"Drachma to weaken if it exits the Euro" - huh?

jimdaly

Newbie
6 1
We frequently hear financial commentators saying that "the Drachma will weaken considerably if it leaves the Euro."

I just don't get this. What will it weaken from? ie What is the starting point from which it will weaken? The Drachma doesn't exist any more, so there is no 'current level' from which it can weaken.

If it exits the Euro, presumably it will start off at a certain rate against the Euro (and all other currencies). But this starting rate will have to be at a level at which the policy makers will believe will achieve a certain amount of equilibrium and it certainly won't be a free money give-away for anyone planning on shorting it.

Therefore, what exactly do commentators mean when they say the "Drachma will weaken considerably when it exits the Euro"?

Is it just another case of commentators spouting rubbish that they know the average person will not be able to challenge them on?
 

jimdaly

Newbie
6 1
The new Drachma will start off at parity to the euro

How did you figure that out?

Regardless, it doesn't answer my question.

My question related to the Drachma weakening AFTER the first level it is set at, when whoever sets the rate would surely know that it would depreciate immediately afterwards, regardless of what rate it was set at.

How does an authority set an exchange rate for a currency exiting the Euro or what mechanism would they adopt for determining its value?
 

jimdaly

Newbie
6 1
Are these rumors recent or old stories ?
May I ask where do these rumors come from ?

Nope. It's neither a rumor nor an old story.

It's a hypothetical question about what mechanism could be adopted to set an exchange rate for a currency exiting the single currency.

I just can't figure out how it could be done.
 

barjon

Legendary member
10,689 1,806
..........I just can't figure out how it could be done..........

Well, they knew what it was when they went in so I guess from that starting point they could "devalue" as much as they wanted if they had a mind to do that.
 

jimdaly

Newbie
6 1
Well, they knew what it was when they went in so I guess from that starting point they could "devalue" as much as they wanted if they had a mind to do that.

But that is my whole point - they don't have a starting point!

The rate at which they went in can not be used as a starting point for the exit, because everyone knows Greece is in a far worse situation now than when it entered. Therefore, there would be relentless (and risk-free) selling at its entry rate, if they used that as a starting point. The authorities are obviously aware of this.

Therefore, they must use a different starting point if the Drachma exits.

Unless someone can tell me otherwise, there does not appear to be a mechanism to facilitate the exit of a currency, which probably explains why the Germans are doing everything they can to prevent anyone exiting.
 

justtrader

Well-known member
470 71
How did you figure that out?

Regardless, it doesn't answer my question.

My question related to the Drachma weakening AFTER the first level it is set at, when whoever sets the rate would surely know that it would depreciate immediately afterwards, regardless of what rate it was set at.

How does an authority set an exchange rate for a currency exiting the Euro or what mechanism would they adopt for determining its value?

I did not figure out anything!
It was an article I read in the economist a while back, when the Greek fiasco started.
The gist of it basically was that, all the countries using the euro have the same monetary value, since the French euro is the same as the German euro, Should the Germans leave the Euro the Mark will appreciate considerably.

On a side note the best solution for the Euro is for The Nordic countries to leave and create a Nordic euro.
 

BeginnerJoe

Senior member
3,329 350
But that is my whole point - they don't have a starting point!

They do have a starting point. That starting point is x% below the greek's starting point. x is a figure not for you to know, but 50% sounds reasonable.

All the former greek bond holders will take revenge. So even a 50% discount may not be enough. I'd suggest you wait until it stabilised for about 6 months and then start to trend up before you jump on board.
 
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barjon

Legendary member
10,689 1,806
But that is my whole point - they don't have a starting point!

The rate at which they went in can not be used as a starting point for the exit, because everyone knows Greece is in a far worse situation now than when it entered. Therefore, there would be relentless (and risk-free) selling at its entry rate, if they used that as a starting point. The authorities are obviously aware of this.

Therefore, they must use a different starting point if the Drachma exits.

Unless someone can tell me otherwise, there does not appear to be a mechanism to facilitate the exit of a currency, which probably explains why the Germans are doing everything they can to prevent anyone exiting.

I meant a starting point as in the rate when they went in. As BJ says, they can "devalue" it from there to set the initial rate when (if) they exit. Assuming they allow free exchange the market will then determine whether they pitched it correctly.

You only have to think what the Deutchmark/Drachma exchange rate might look like since Greece joined up without them both being tied to the Euro. As the continually strongest economy in the euro zone Germany are in the happy position of having an artificially undervalued currency, whereas Greece with the weakest economy are under the cosh with an artificially overvalued one.
 

justtrader

Well-known member
470 71
I meant a starting point as in the rate when they went in. As BJ says, they can "devalue" it from there to set the initial rate when (if) they exit. Assuming they allow free exchange the market will then determine whether they pitched it correctly.

You only have to think what the Deutchmark/Drachma exchange rate might look like since Greece joined up without them both being tied to the Euro. As the continually strongest economy in the euro zone Germany are in the happy position of having an artificially undervalued currency, whereas Greece with the weakest economy are under the cosh with an artificially overvalued one.

The Euro has got to be the most ridiculous marriage ever!
On one side the Germanic Countries : Hard working, industrious,conscientious,Honest
On the other side
Latins: Dodgy, lazy, Unscrupulous,Dishonest.
:LOL::LOL::LOL:
 

zorbas

Established member
606 0
Well, they knew what it was when they went in so I guess from that starting point they could "devalue" as much as they wanted if they had a mind to do that.

It doesn't matter a lot what was 20 or 30 years ago, because economies evolve.

Due to the different developments a chasm has developed between the North and South or core and peripheral countries.

Isn't it the same in USA, where there are many states under the same currency umbrella ? Are all states equal and the same to live in ? Or is there a huge chasm that has been developed ?
 

justtrader

Well-known member
470 71
You cannot compare a monetary union, which has been going for 200 odd years, to one that's only been in existence for just over 12 years.
 

barjon

Legendary member
10,689 1,806
It doesn't matter a lot what was 20 or 30 years ago, because economies evolve.

Due to the different developments a chasm has developed between the North and South or core and peripheral countries.

Isn't it the same in USA, where there are many states under the same currency umbrella ? Are all states equal and the same to live in ? Or is there a huge chasm that has been developed ?

Yes, and generally the the exchange rate evolves in step which could not happen in the eurozone. All states in the USA are not equal in terms of economic development but they all operate under the umbrella of federal economic policy which prevents a chasm getting too deep. In the absence of central eurozone control of economic policy the attempt was made to have something similar by creating rules. Everyone just broke them, though, not the least Greece who even broke them on the way in by some deft accountancy.
 
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