Exclusive to HellasFrappe
By Vasilis Tomaras
Managing Partner @ Aidelco Consulting
The prospect of leaving a monetary union –or the Eurozone- which Greece was never suited to join in the first place, is not anything new since this question has been looming on the news for several years now. What was meticulously kept out of the media, however, was a secret plan to enable Greece to withdraw from the Eurozone in the event of a banking collapse. This exercise was drafted under cloak and dagger and in a complete isolation vacuum by representatives from the European Central Bank, International Monetary Fund, Euro Working Group and European Commission. The plan is known as Plan-Z.
When former Greek premier George Papandreou announced the holding of a referendum on October 31st 2011, on a question which to date is still unknown, few doubt that the underlying enigma was a straightforward YES or NO the Euro. This referendum was swiftly shelved and three days later, Papandreou stepped down, and soon after that he was replaced by a technocrat.
Since the beginning of the Greek crisis in 2009, whispers and gossip in the halls of power has been non-stop as to what the impact on the European and Global economy would be should Greece leave the Eurozone. This speculation was further reinforced by George Papandreou’s mothballed referendum.
Purpose and Participants
"Work on Plan Z began in earnest in January 2012, largely overseen by four men. Jorg Asmussen, a German who had joined the ECB executive board that month, was assigned by Mr Draghi to head a Grexit task force within the central bank. Thomas Wieser, a long-time Austrian finance ministry official, was appointed permanent head of the "euro working group" of finance ministry deputies and helped co-ordinate work in Brussels with Mr Buti. And Poul Thomsen, a Dane who had headed the IMF's Greek bailout team since the onset of the crisis, provided input from the fund in Washington.Work was done in complete secrecy in Brussels, Frankfurt and Washington. No minutes were kept, no single documents were created, no mails were exchanged and No Greek officials were informed.
"Efforts to keep information from leaking from the small teams around the four men were extreme for the same reason Mr Trichet had banned such planning: public discovery could be enough to cause the kind of panic that would force them to put their plan into action.
"According to one participant, no single Plan Z document was ever compiled and no emails were exchanged between participants about their work. "It was totally fire-walled even within [the institutions]," said the official. "Even between the teams there was fire-walling." A decision was made not to involve Greek officials out of fear of leaks.
"Their firewalls worked. During a dinner between Jose Manuel Barroso, the commission president, and Ms Merkel at the chancellery in Berlin less than two weeks before the Greek vote, Ms Merkel asked for reassurance from Mr Barroso that a plan was in place in case Greece rejected bailout conditions and Grexit ensued." (www.euro2day.gr)
Quite interestingly, the plan was executed in such secrecy that not even German Chancellor Angela Merkel knew about it. This can be confirmed by the fact that at an official dinner two weeks before the Greek elections in 2012, she asked the then head of the European Commission Manuel Barroso for a plan be drafted to prepare for a potential exit from the common currency in case Greece rejected bailout conditions. Barosso subsequently informed her that such a plan was already in motion and offered to present it her. Merkel, however, refused to take it, claiming that under German law, only the German Bundestag could request such documents. According to German legislation, even if there was one German official involved in the drafting of the plan, full disclosure of the plan in German Parliament would have been obligatory.
The Financial times says that this secretive plan consists of 20 pages with detailed actions on how to create a new financial system from the very beginning. FT says that the plan is based on scenarios consolidated from the experiences gained in Argentina and the introduction of the New Iraqi Dinar from the Americans in 2003.
(Trivia: The title ''Plan-Z'' was the name given to the Top-Secret secret re-equipment program of the Kriegsmarine (German Navy) By Hitler just before WWII in contravention of the Versailles Treaty.)
Leaving the Euro: A Practical Guide and the Wolfson Economic Prize
‘’Plan Z’’ was never published. Economics is a science that is chiefly influenced by circumstance and school of thought. A separate study, that is well known and has won the Wolfson Economic Prize titled ‘’Leaving the Euro: A Practical Guide’,’ was drafted by the London based think-tank Capital Economics. This report claims that the most realistic scenario for euro break-up is that one or more of the weaker peripheral countries will leave the euro-zone, introduce a new currency which then falls sharply, and default on a large part of their government debt. Other forms of break-up are possible but this report centers on the departure of a single weak member.
As such, we can safely assume that ‘’Plan Z’’ has many aspects of this study in it.
• Potential long term division of the current Euro into a ‘’hard’’ and ‘’Soft’’ Euro. The implications when one weak country, like Greece leaves the Eurozone and implements its own currency - Analysis conclude that an ‘optimal currency area’ known as the northern Bloc would be concluded by countries with compatible economic dimensions (Germany, Austria, Netherlands, Belgium and Finland). By extension, there is a strong possibility that the peripheral Southern states break away and either adopt their own domestic monetary structures and policies or form a monetary union between themselves.
• Bank run in face of pending Banking failure: This has been happening in Greece in various degrees from 2011. We saw the climax in late June 2015.
• Implementation of Capital Controls: To further stem outflow of capital. We saw this happening in Greece this past week.
• ‘’Bail-in’’ (bank deposit haircuts): The next step is Bail-in, commonly known as haircut which will mostly affect the average investor. Under the Euro, deposits of up to 100.000 EUR are protected under EU Directive 49. Under a new currency, this protection may not apply to the smaller deposit holder. Even if it did, technically speaking 80% of Greek bank deposits is currently under 20.000 EUR. Practically speaking, only small deposit accounts will be available for haircut pooling and may be executed in contravention of Directive 49.
• Devaluation and redenomination outlook: Leaving the Euro will comprise of two events.
- Currency conversion and redenomination of wages and prices.
- Change in the exchange value of the currency. In the case of Greece, that change results in depreciation
• Management and decision making process during implementation: How to plan in secret, the legal and constitutional implications involved and management of relations with other countries, including those In the Eurozone.
• Surviving without cash: On the day the New Greek Drachma is declared, all bank deposits, bonds, other instruments and assets are redenominated in that currency. An exchange market will commence and the exchange rate would fall well below conversion rates announced by authorities, 50% by conservative estimates. All this is accomplished electronically and without physical coins and notes. A great proportion of transactions will be made within the framework of a modern ‘’cashless’ society, ie credit-debit cards, cheques, e-bank orders and IOU’s.
• Wider Capital Controls: Disconnecting the Greek Banking system from the European TARGET2 Interbank processing system may not be the only capital control measure. More stringent capital controls could be imposed. Resident households and businesses may be forbidden to acquire foreign assets without clearance. Investing overseas and holding bank foreign accounts may be forbidden or severely limited and foreign businesses operating in Greece may be forbidden from repatriating profits severely effecting foreign investment potential. Just a matter of example, exchange Controls (which are very similar to capital controls) were introduced in South Africa as a temporary measure in 1961. Five decades later, a close version of the original structure is still in force.
• Default under foreign and domestic devaluation: In the case of external devaluation, the effect is immediate. Internal devaluation has a gradual build up over time effect. Monies owed to the ECB and other institutions will be denominated from Euro to Drachma and then devaluated immediately afterwards, this will further decrease debt- service ability, therefore default under soft currency which is worse.
• Negotiated debt restructuring: This was attempted under the umbrella of the Euro. Under a national currency, redenomination and devaluation alone is sufficient to make the debt further unsustainable. Negotiated debt restructuring will be inevitable and the scale of such a scenario is unclear. In any case, negotiated debt restructuring will put Greece at a disadvantage should the negotiations be conducted under a soft currency like the New Greek Drachma.
• Liquidity after Euro Exit and default: for a country like Greece that has difficulties funding their expenditures through tax revenues and other streams, has been downgraded by credit agencies and is locked out of capital markets, a combination of negotiated debt restructuring, potential debt reduction, devaluation and possibly further spending cuts will be needed as tools to re-establish and regain fiscal policy credibility in order to re-enter the markets.
• Real Wages: The depreciation of the new currency will have profound effects on real wages. To make the effect as small as possible, wages will have to be frozen for some time to compensate. Real wages effected by inflation could fall anywhere between 5%-20%.
• Bank loans: Since bank loans were taken in Euro’s, redenominated values will remain in Euro’s. Greece may insist that private sector’s international debt be redenominated into the new National currency, but is unlikely to achieve this. This means a sharp rise in domestic value of private bank debt.
• Property prices: Greek property will become more attractive for foreigners bearing hard currency. If foreign demand is strong enough, property prices will rise sharply making property purchase less attainable for average Greek people.
• Social unrest and disorder: There are two very prominent examples of financially fuelled political unrest in recent history. One was the Argentinian events of 2000 and the Albanian Ponzi scheme collapse of 1997 which sparked a rebellion to such an extent that not only led to the toppling of a democratically elected government (in both cases) but also operation Silver Wake, where United States military intervention was mobilized to evacuate their citizens from Albania. A report from Barclays expects that this sudden economic collapse in Greece would "aggravate social unrest".
IOBE and NBG reports
The truth is that Capital Economics and the creators behind Plan-Z are not the only think tanks and centers of influence who think the effects of abandoning the Euro will have grave repercussions to the average people. According to statements by Greek think-tank Foundation for Economic and Industrial Research (IOBE), a new drachma would lose half or more of its value relative to the euro. This would drive up inflation, and reduce the purchasing power of the average Greek. At the same time, the country's economic output would drop, putting more people out of work where one in five is already unemployed. The prices of imported goods would skyrocket, putting them out of reach for many.
“On 29 May 2012 the National Bank of Greece warned that "[a]n exit from the euro would lead to a significant decline in the living standards of Greek citizens." According to the announcement, per capita income would fall by 55%, the new national currency depreciate by 65% vis-à-vis the euro, and the recession which Greece has been in for five years would deepen to 22%. Furthermore, unemployment would rise from its current 22% to 34% of the work force, and the inflation, which is currently at 2% would soar to 30%.Secrecy Vs. Openness
"Renowned Greek ‘’analyst Vangelis Agapitos has estimated that inflation under the new drachma would quickly reach 40 to 50 per cent to catch up with the fall in the new currency's value. To stop the falling value of the drachma, interest rates would have to be increased to as high as 30 to 40 per cent, according to Agapitos. People would then be unable to pay off their loans and mortgages and the country's banks would have to be nationalised to stop them from going under, he predicted.” (www.zerohedge.com)
One of the core elements in a GREXIT, further demonstrated in how Plan Z was conducted, is secrecy. Keeping the people in the dark with as little disclosure for as long as possible is key in minimizing the disruptive effects of a GREXIT (capital flight, fall in asset prices, bond yields, speculation etc).
Examples of how secrecy triumphed over openness in managing radical fiscal change policies are the Sterling’s exit from the European Exchange Rate Mechanism in 1992, the breakup of the Czech-Slovak Monetary Union following the political fragmentation of Czechoslovakia in 1992 and the more recent rapid adoption of a brand new currency by South Sudan after it’s break-off from Sudan.
Although non-disclosure is by definition frowned upon, further side effects of non-disclosure explained in Capital Economics study is the exclusion of cross-party consensus, reduced public confidence in their governments, civil unrest and households’ inability to plan going forward.
Saving Vs. Amputation
There are two streams of thought right now on how to handle the Greek crisis. One of them is shared by leaders such as German Chancellor Merkel and French President Hollande and it conceives the idea that Greece be nursed back to fiscal health within the EU/EZ. The other stream of thought expressed by the likes of the German Finance Minister Wolfgang Schaeuble calls for quote- ‘’the amputation of Europe’s infected limb – Greece – to stop the sickness from spreading’’ - unquote.
The cost of transition
Given the complexity of the Greek issue and the fact that there is no precedent, accurately quantifying the impact in Dollars and Cents, it is difficult at this stage to estimate the cost (some experts say 500 Billion to the European economy, others cite twice that amount). It is my opinion that Europe and world economic forces, through studies like Plan Z, are much better prepared to contain the damage within Greece with minimum spillage outside its borders.
The years after
The below content is my own thoughts to the above and outside of the scope of Plan-Z, Capital Economics’ handbook and the experts quoted.
In all fairness, one has to also look at possible advantages the adoption of a national currency may have on the economy and the people of Greece.
• The country’s heavy industry - tourism will be boosted as visitors bearing hard currency will find Greece difficult to resist as a budget holiday destination. The spike in visitors will in itself provide conditions for supporting infrastructure (more airports, ports, Marinas, golf courses etc).
• With infrastructure projects come jobs. Of course, one has to bear in mind the artificial construction boom bubbles of China and Turkey, where their governments have to keep creating infrastructure projects, some useless, and to the detriment of the taxpayer just so keep unemployment figures low.
• Since devaluation and inflation will render exports much more expensive under a National Currency, it will most likely provide a stimulus for Greece to expand its domestic industrial output. This will boost exports in the long run, providing of course the Government provides incentive policies and a favourable taxation environment.
• National sovereignty on the political stage can be exercised more freely without mass intervention from Brussels. This has to be done with caution as under our own steam, we may not have the EU support mechanisms and Veto powers. The Greek government has to take this into consideration in view of loose ends such as FYROM, Cyprus, EEZ, just to name a few.
• Monetary and Fiscal sovereignty on the economic stage can also be exercised without great intervention from Brussels. Of course, becoming the master of your fiscal and monetary policy has a cost due to the fact the economic support mechanisms currently in place will no longer be accessible (ESPA, Erasmus, agricultural subsidies, EFSF, ELA).
On the other hand, Greek citizens have to realize, and accept, that the road to this development will be paved with generations of adversity and hardship. It will be full of decades of isolation, inflation, devaluation, interest rate spikes, fall in living standards, speculation, business flight, social and civil unrest and even more austerity. But the most important loss of all will be all the European political and economic support mechanisms the people of Greece acquired over 20+ years with great sacrifice.
- FT: Top secret “Plan Z” for the Greek exit from Eurozone Why Mrs Merkel refused to take it – Who were the authors of the draft – What was the role of Barroso - http://en.protothema.gr/ft-top-secret-plan-z-for-the-greek-exit-from-eurozone/
- Quantifying The Plan Z Dry Powder - This Is The Greek ELA Borrowing Capacity http://www.zerohedge.com/news/quantifying-plan-z-dry-powder-greek-ela-borrowing-capacity
- JPMorgan Estimates Immediate Losses From Greek Exit Could Reach 400 Billion http://www.zerohedge.com/news/jpmorgan-estimates-immediate-losses-greek-exit-could-reach-400-billion
- Roubini: GREECE SHOULD DEFAULT, LEAVE THE EURO http://grexit-planz.blogspot.com.tr/2014/12/dr.html
- Το Βερολίνο... ξεσκονίζει το σχέδιο «Ζ» για Grexit! http://grexit-planz.blogspot.com.tr/2014/12/grexit_99.html
- Leaving the euro: A practical guide http://www.policyexchange.org.uk/images/WolfsonPrize/wep%20shortlist%20essay%20-%20roger%20bootle.pdf
- «Καλά στημένη υπόθεση το Grexit - Διασκεδαστικές οι δηλώσεις του ΣΥΡΙΖΑ» http://grexit-planz.blogspot.com.tr/2014/12/financial-times.html
- Deposit Guarantee Schemes - http://ec.europa.eu/finance/bank/guarantee/index_en.htm
- DIRECTIVE 2014/49/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL ON DEPOSITS - http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0049
- The Greek debt writedown and Merkel's role in it - http://www.ekathimerini.com/196773/article/ekathimerini/comment/the-greek-debt-writedown-and-merkels-role-in-it
- Plan Z – Wikipedia - https://en.wikipedia.org/wiki/Plan_Z