On Wednesday, Germany’s chancellor Angela Merkel declared that “the future of Europe, and the future of Germany in Europe” was at stake. The context: an appeal to the Bundesbank, Germany’s central bank, to support a €22.4bn three-year loan to Greece.
But the multilateral bailout of the Hellenic Republic is rapidly being overtaken by events, not least riots in the streets of Athens.
Capital markets — be they equity, CDS, forex or debt — have also been shaken. The euro dropped to a one-year low against the dollar on Wednesday, a decline which, according to the FT, has raised concerns over the single currency’s reserve status:
Simon Derrick at Bank of New York Mellon said the euro’s breach of $1.30 against the dollar could have an impact on the behaviour of the world’s central bank reserve managers, which could drive the single currency lower still as they pondered its status as a reserve currency.
…
Mr Derrick said the events of the past few months had led to a warranted re-evaluation of what the euro actually represents.
“It is not just the new German deutschemark, but also the new Greek drachma and Spanish peseta.”
Some analysts and politicians have suggested Greece should leave the eurozone, but such a move would neither be easy, nor even a solution to either the Republic’s or the currency union’s woes.
From a strictly legal standpoint, the challenges are formidable, not least because there is no precedent for either withdrawal or expulsion from European Monetary Union.
Moreover, to quote a 2009 publication by the ECB titled, ‘Withdrawal and expulsion from the EU and the EMU: some reflections‘ (emphasis ours):
In the unlikely event that a Member State withdraws voluntarily or is expelled from the EU, its NCB’s membership of the European System of Central Banks (ESCB) and euro area participation would be terminated, with the departing Member State having to restore its old currency or adopt a new one. Restoring a Member State’s old currency or adopting a new one would inevitably involve considerable risks and difficulties and entail substantial legal complications, including with regard to the validity and enforceability of outstanding re-denominated contracts between debtors in the withdrawing Member State and their creditors. Successfully resolving the issues arising would necessitate very close cooperation between the departing and the remaining Member States.
And according to a story in Risk magazine which featured interviews with legal experts on the matter:
“The prevailing view has been that a country cannot unilaterally legally exit the euro, so we might just as well worry about a member country announcing it would not honour any other treaty commitment.”
…
“Article 50 of the Lisbon Treaty [signed in 2007] allows a member state to withdraw from the European Union as a whole…But it does not contemplate a withdrawal from the single currency alone. It is not possible to infer a right to withdraw from the euro, since the Maastricht Treaty [signed in 1992] stated that the currency substitution would be ‘irrevocable’.”
Still, in the event Greece’s leadership is willing to contemplate such measures, they may well already have a PR agency on hand to deal with the ‘messaging’.
According to Bloomberg, which cited “people with direct knowledge of the efforts”:
Greece…is seeking to hire an international public-relations firm to bolster its case in the financial press…They include Maitland Consultancy Ltd., Brunswick Group LLP and Financial Dynamics International, said the people, who declined to be identified because the search is private.
But as PR and media database Gorkana wryly noted:
The catch in this instance is will the agency get paid. Presumably invoices will need to forwarded to the Bundesbank.
Forwarding invoices would not be an option if Greece did leave the eurozone, of course.
So how do you say Catch-22 in Greek, dear commenters?
Related links:
A drachma-tization – FT Alphaville
Merkel’s calls for ‘orderly insolvencies’ threaten more disorder – FT Alphaville
Europe’s choice is to integrate or disintegrate – Wolfgang Münchau / FT
How Investors Can Profit From Break-Up of Euro: Matthew Lynn – Bloomberg