08:51 – With it likely that Greece will crash out of the euro in the coming weeks, it seems that they’re already printing up massive stocks of new drachma notes in denominations up to 10,000 new drachma.
If and when that happens, you can bet that Greece will set the initial exchange rate at parity, effectively defaulting on their euro-denominated debts because that new drachma will very quickly lose a huge percentage of its nominal value. Those who currently hold $300+ billion in Greek debt will find that 90% of that value has evaporated.
I’m surprised that the Greek government hasn’t (yet) instituted capital controls. Capital outflows from Greece are already huge and are accelerating. In January alone, they amounted to about €1,000 for every man, woman, and child in Greece. This from a very poor country, where most people don’t have two euros to rub together. Everyone who is able to do so is getting his euros out of Greece, knowing that they’ll soon be replaced 1:1 with worthless new drachmas.
The eurozone believes it has the mechanisms in place to isolate Greece and prevent the contagion from spreading. They don’t. They’re prepared to stick fingers in a leaking dike, but they’ll find themselves facing a tsunami that will overwhelm their defenses. The rest of the PIGS will follow Greece, leaving all of southern Europe reverting to native currencies. Eventually, even France will be forced to follow. As Thatcher and others pointed out at the time, the euro always was a bad idea, a currency without a country. We’ll be watching it break up over the coming months and years.