Greece's public debt is in euros. It is estimated at 360 billion euros. In US Dollar terms that's currently $500 billion. If Greece exits the Eurozone it will bring the entire currency union to the brink of collapse.
Let's say Greece exits the Eurozone and adopts the US Dollar as its de facto currency for a five-year transition period. The value of the euro will collapse vis-a-vis the US Dollar from the current US$1.35/€ to a possible US$0.70/€ assuming a roughly 50% decline in the euro's value. Such a euro collapse is entirely possible if Greece abruptly exits the Eurozone and is followed by talk of other Eurozone countries following suit. Due to the devalued euro the Greek debt will then calculate to $250 billion in US dollar terms, or a 50% debt reduction in dollar terms. Remember, at its introduction in 1999, the euro was traded at US$1.18/€ but by October 26, 2000 it had fallen to an all-time low of US$0.8228/€. Also, this is not like the 'haircut' proposed last month which would result in a €100 billion debt reduction, at most, with the added risk of a credit event.
The US Federal Reserve can help Greece meet its financing needs during the five year transition period by lending to the Bank of Greece at favorably low interest rates. The US Federal Reserve is a privately-held institution and it has lent funds to central banks in the past via swap arrangements:
The Bank of Greece will authorize an initial money supply in New Drachmas in order to exchange or swap for US dollars with the Federal Reserve. The New Greek Drachma will be pegged to the US Dollar at an initial exchange rate of 30 GRD/1 USD. The New GRD will not circulate during the five-year transition period to prevent currency fluctuation. The GRD money supply during the five-year transition period will be used strictly for swaps with the Federal Reserve. For five years Greece's debt obligations and any budget deficits will be covered by the Federal Reserve funds swapped for the New GRD. After the five-year transition period Greece will introduce the New GRD as its official currency.
This plan will boost American investment in Greece, including investment from Greek-Americans who will proudly participate. A trade treaty between Greece and the US can be signed eliminating all import tariffs between the two countries. American tourism to Greece will be boosted as the currency in both countries will be the same for the next five years. Drilling for gas and oil in Greece's Exclusive Economic Zone can be contracted to US companies. Greece will buy military hardware solely from the US as part of the new arrangement. Bank deposits will return to Greek banks as threats of a default will be diminished.
Greece's debt interest costs will be reduced considerably. Sound fiscal management should result in a primary budget surplus. Greece can continue the liquidity swaps with the Federal Reserve until it can issue sovereign bonds in the open market at interest rates favorable to Greece.
This will install confidence in the new Greek economy and we will immediately see the light at the end of the tunnel.
Georgios Gialtouridis
Boston, MA
