12 Devastating Consequences if Greece Returns to the Drachma

A worker cleans the word ''NO'' written in Greek with spray paint early morning calling for a ''No'' vote in the upcoming ref
A worker cleans the word ''NO'' written in Greek with spray paint early morning calling for a ''No'' vote in the upcoming referendum, at the entrance of a suburban railway station in northern Athens, Sunday, June 28, 2015. The European Central Bank has announced it is maintaining emergency credit to Greek banks at its current level. The decision keeps a key financial lifeline open but does not provide further credit to Greece's banks, which are seeing deposits drain away as many anxious Greeks withdraw savings. (AP Photo/Thanassis Stavrakis)

Lately we see, artfully cultivated from various circles, a climate in Greece in favor of returning to the drachma. There's an orchestrated propaganda push to influence public opinion by profit motivated business centers with selfish purposes, which exploit the resentment of the people after six years of recession and the absence of a clear exit plan for the crisis.

That climate is also supported by the fact that a significant portion of executives of the two coalition parties openly support the return to the drachma and against any form of reform moving in the opposite direction.

Although the majority of the people remain consistently positive about the European orientation of the country and would like to have the euro as currency, the percentage of people stating to be indifferent to a possible transition to the drachma and believing that it will not change their standard of living, has increased. However, by analyzing all the financial data of such a development, we conclude that the effects will be very hard and painful.

Namely, the consequences of return to the drachma would be:

  1. Rapid devaluation of the drachma against other currencies (the rate might surpass 1,000 ΔΡΧ/1€). An attempt to tie the drachma to the euro and lock the conversion rate is doomed to fail (as it failed in the case of Argentina), because of the huge capital flight and depletion of foreign exchange reserves.
  2. The devaluation will lead to skyrocketing inflation at levels equal and greater than 40 percent, further limiting thereby the purchasing power of citizens.
  3. Capital flight and a sharp increase in non-performing loans will be the coup de grace for the weak country's financial system, which would collapse, "drying" the real economy.
  4. In such an eventuality the wage and pension freeze payment will be inevitable for a while until the partial restoration of liquidity. The consequences from social unrest that will likely follow are unpredictable.
  5. Gross domestic product will likely shrink to about 2/3 of the current level.
  6. The public debt of Greece, totaling 322 billion euros, will increase automatically depending on the amount of the depreciation of the drachma, multiplying our borrowings.
  7. Even if, after bankruptcy, a partial debt restructuring follows, it will not be painless. It will be accompanied by a new rescue package (only from the IMF now) and very burdensome fiscal adjustment measures.
  8. There will be an equal increase of private debt through the skyrocketing of lending and depositing rates in an effort to control inflation. Higher interest rates will also make it difficult for businesses to raise capital.
  9. Suffocation of import business due to a weakened market, the devaluation of the drachma and the obvious lack of credit.
  10. Failure of imports will bring shortage of essential items on the market since, as we know, Greece is not self-sufficient in raw materials and meets its needs (eg. wheat, milk, meat) by imports from foreign countries.
  11. Invasion of predatory foreign investors, who will acquire companies, property, and public property at derisory prices. It will lead to a sellout of the country, now claimed by the proponents of the drachma.
  12. Diplomatic and economic isolation of Greece, who, being in a very difficult situation, will not be able to follow geopolitical developments in the region, as well as any challenges by its neighbors.

It's clear that we should not base our hopes on futile and dangerous solutions, such as returning to the drachma. Let us draw up a long-term plan for the next day, that will turn Greece into a modern, well-governed European country with a strong economy and liberated from the chronic pathologies that pester it.

This post originally appeared on HuffPost Greece and was translated into English.