Sunday, June 28, 2015

Euro with a "Y" is the new Drachma

When the Greek central bank prints Euros, they have a "Y" on them.  Up till now these Greek Euros were exchanged 1 for 1 with any other Euros.

The Target2 system for electronic payments is how they kept all the different Euros values pegged to each other.   However, if Greece no longer gets unlimited credit from the ECB the electronic Euros inside Greece can no longer be converted in unlimited amounts to Euros in other countries.  The Greek Euros are sort of an island separate from other Euros.  If Target2 does not work for Greece, then Greek Euros are no longer regular Euros.

The peg between Greek Euros and others is failing.  No longer will Euros in Greek banks or Euros printed by the Greek central bank be as good.  People will soon prefer to hold Euros with anything other than an "Y" or in banks outside Greece.    Capital controls in Greece now limit how fast people can take Euros out of Greek banks, while the same ATM does not limit someone with an account in another country.  Euros in Greek banks are not as good as Euros in banks in other countries.   It could soon be that people outside Greece no longer accept Greek Euros.  Where they are accepted, the Greek Euros could trade at a discount to other Euros.  The worse things get the bigger the discount will become.   Euros with an "Y" can become a separate special Greek only Euro, or effectively, Drachma.

As long as Greece was running a big deficit and on net getting more money each year from the Troika it made sense for it to do whatever was required of it.   If Greece did not they would not have enough money to operate the government, since nobody else would loan them money.  However, after getting to the point where they have a budget surplus and were going to be on net paying money to the Troika, they really can default and probably are better off to do so.

If a company could shed liabilities while still holding onto all its assets and sources of income, then it will be in a stronger financial position.    Countries are similar when defaulting on external debts.   Most of the time countries can default without any invasion or other real penalty.  I don't expect Greece to be invaded because of their default.

When England and the USA defaulted on their promise to redeem their paper notes for gold the rest of the world was worse off and they were better off.   It helped them get out of the Great Depression.   In the short term Greece is no doubt in trouble, but in the longer term defaulting should remove a huge burden from their shoulders and leave their creditors worse off.

If Greek Euros are not equal to other Euros, it is as if "Greece has left the Euro".    The market price for the Greek Euros will just be different than other Euros.   This can happen fast without any deliberate action by any government.  Maybe in the next few weeks.

We might see a "black market exchange" where a tourist coming into Greece could exchange their regular Euros for more local Euros.  This could encourage tourism to Greece.

At some future point, when it is clear Greek Euros are no longer regular Euros, Greece could exchange Greek Euros for a newly issued Drachma.

If the Greek government keeps a nearly balanced budget the Greek Euros or Drachma should stabilize after an initial adjustment.   If they start running big deficits in the near future, hyperinflation is a possibility.

We live in interesting times.

Update 7/4/15:  An earlier version of this post said Euros with an "N" were from Greece.  It seems this is the printer code and "Y" really means Greece.   Thanks for commenter below pointing this out.


  1. Vincent, you might like this:

    or this:

  2. Thanks!

    Interesting times. I don't think calling a new money "IOUs" or some other name really makes much difference. Value is much more a question of supply and demand than a name.

  3. Using you can check the bitcoin/Euro exchange rate for walkup/cash transactions in different places. So far I don't see a difference for inside Greece and outside.

  4. Here is another post saying that money in a Greek bank is not really as valuable:

  5. Another thought. There is a very big risk of a Cyprus style "bale in" where people with money in Greek banks loose a big portion of their deposits. Because of this, money in Greek banks is not really as valuable.

  6. Another article noting that Greek Euros could just split off from other Euros.

  7. If the banks returned to normal on Monday, the rush to withdraw money, after a week of tight limits on withdraws, would probably be more than they could handle without a huge bale out. It is hard to see how the banks return to normal any time soon.

  8. Poor advice. You are shorting Austrian euros. Greek euros start with a Y. You have confused the country code with the printer's code.

  9. I know as I write this comment THAT the Greek polls will close in about 4 hours and that a lot of cash has left Greek banks.

    What I do not know is if the cash recently disbursed in Greece ALL has a Y as the leading letter in the serial number.

    If the cash has a high percentage of other leading letters, then the fact that Greece is a very small economy is a leading factor in deciding how euro cash is serialized.

    On the other hand, if a large percent (or all) of the recently disbursed cash has the leading Y, then Greece debt is being traded in the form of cash. What if most of all euro cash (including cash in not-Greek nations) had a Y leading the serial number? Then Greed debt is being traded as cash money throughout the euro zone.

    I have no idea about how widely spread the Y serial number issues are distributed. It would be an interesting and revealing statistic.

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