Who, What, Why: How would Greece switch currencies?
- 12 June 2012
- From the section Magazine
Political change within days in Greece may mean the country has to ultimately leave the euro. If that was to happen, how would they go about introducing a new currency?
On Sunday, Greek voters could hand power to anti-austerity parties who want to scrap the bailout, the deal that qualifies Greece for vital eurozone funds.
This would bring the country a step closer to a possible exit from the euro. So how could a new currency like the drachma be (re)introduced?
A new government would have to produce enough new notes to replace those currently in use in Greece while also doing their best to prevent a run on the banks.
It would have to be introduced over a public holiday and there would be an interim phase between currencies.
The preparations would ideally occur in secret, says Jonathan Loynes, chief European economist of Capital Economics.
"If Greece were to introduce a new currency, they would have to impose some capital controls once the change had been announced. This would mean that people would only be able to withdraw a certain amount of money from their accounts, which would be necessary to keep things orderly and avoid a run on the banks.
"Then there would be some sort of public holiday during which banks and financial markets would be closed. In an interim period before the new currency is introduced, people could pay for things electronically or with small denominations of euros until the new currency became available."
The new currency would then be introduced on a one-to-one exchange with the old, he says, but at some point the capital controls would be lifted and the new currency would sharply devalue.
This is what happened during Argentina's economic crisis at the turn of the century. When the banking system came close to collapse, withdrawals were banned. The peso dropped in value, leading to high inflation, after Argentina defaulted on its public debt in 2002.
Recent reports have pointed towards English currency printer De La Rue as a possible source of new drachma banknotes.
Director of marketing for De La Rue, Rob Hutchison, will not comment on speculation that the company has drawn up a contingency plan for the production of new drachma, but he explains that the money-printing process itself can take several months.
"You have to consider the preparation of special banknote paper incorporating security features; the design of the notes; the process of bringing these elements together and then printing. It simply couldn't be done overnight," explains Hutchison.
Economist and author of Greece's Odious Debt, Jason Manoloupoulos, agrees.
"I have heard that that the process could take anywhere between three to six months."
So what is involved in the actual process of changing banknotes?
There is a lot to do, says Julie Girard, currency spokesperson for the Bank of Canada, which has been involved in that country's recent transition from paper to polymer notes.
The many considerations in currency production range from the selection of the best base material and security features to the design on the notes.
"We have a team of chemists, physicists and engineers whose job it is to go out into the marketplace and see what types of security features are available, both in other currencies and through companies that produce security technology."
These are assessed, as are different base materials to produce a cost-effective but secure note. Focus groups decide on designs and then notes are produced and distributed, says Girard.
With so many cash transactions and withdrawals now taking place at ATMs and vending machines, these must be adapted to fit a new type of note.
"We spent about two years working with companies that produce machines which dispense, accept and sort paper currency, providing test notes and staff from the bank to help them. Some machines may have needed to be replaced, adapted or upgraded," says Girard.
Greece wouldn't have the time that Canada did, but preparations may have been secretly going on for months.
Greeks have already reportedly begun to stash euros in safety deposit boxes and under mattresses .
These notes could be used to finance transactions even if another currency became the local tender, says Michael Massourakis, director of economic research for Alpha Bank, Greece.
"You can't stop people using that money to buy things, even if you make it illegal to use foreign exchange in transactions. The euro could still be used afterwards on the black market, for example."
But just how "new" would a new Greek currency be? Reports on Greece's financial future concentrate on the idea of the drachma - the currency which was replaced by the euro in 2001. Could these old notes be re-used?
Although old drachma were still accepted in exchange for the euro by the Bank of Greece as recently as February 2012, most will have been shredded and burned, says the British Museum's Thomas Hockenhull.
"If the original drachma printing plates still existed, it could be a fairly straightforward process to change the dates and use the existing machinery," he says.
And coins may be ditched entirely. "They may just do away with coins and have only paper currency," says Hockenhull.
"The cost of producing a coin can be more than that of making a paper note, because of the metal content."
Reporting by Susannah Stevens