Neither Euro, Nor Drachma: Could A New *Geuro* Currency Save Greece?

Top economists at Germany's Deutsche Bank suggest creating a second "parallel" currency, alongside the euro, to save Greece. They also believe Greek banks should be turned into a European-managed "Bad Bank," a

Still holding on, but the Greek crisis may be bound to end in drachma.. (dullhunk)
Still holding on, but the Greek crisis may be bound to end in drachma.. (dullhunk)
Sebastian Jost

BERLIN - Thomas Mayer is one of the highest-profile economists in Germany. Deutsche Bank's chief economist explains the euro crisis so clearly that anyone can understand all the moving parts. He calls a spade a spade, and tells the German taxpayers what the risks are. He also thinks outside the box.

And he just proved it again at the Welt Group and Stiftung Familienunternehmen (Family Business Foundation) conference on currencies -- a subject that has been preoccupying politicians and economists for months. The hot topic was: should Greece stay in the euro or re-introduce the drachma?

Mayer and his colleagues at Deutsche Bank have come up with a third option: introduce a brand-new second currency, alongside the euro, in Greece.

"The Greek government is soon going to be issuing IOUs to state workers," Mayer said at the Welt conference. "There's going to be a parallel circulation of promissory notes and euros." And he's already come up with a snappy term for the new parallel currency: the "Geuro."

A parallel currency

"I believe that the most probable development will be a currency that circulates parallel to the euro," he said. This would for example make it possible for exporting firms to lower salaries so that they can do business again. And it would make it possible for a bankrupt government to honor its commitments.

"It's not likely that Greece will formally leave the euro, or that other euro countries will turn away from Greece completely," the Deutsche Bank economists write in their report.

The "path of least resistance" could, following electoral victory of radicals in Athens, mean stopping payments for running budget expenses and only paying money Greece needs to service its debts. And if that were to happen, "there could be a parallel currency to the euro," the study says.

According to Mayer, Athens could kill two birds with one stone by handing out IOUs . On the one hand, a departure from the euro could be avoided. On the other hand, a de facto adjustment of the exchange rate would become possible. "At first, the result could be massive devaluation," says Mayer, but the government could then stabilize the country with structural reforms thus keeping the door open for a complete return to the euro.

A European-led "Bad Bank"

However, even with this scenario Greece could only survive economically if failed Greek banks were turned into a European-managed "Bad Bank."

This would enable them to claim funds from the European Financial Stability Facility (EFSF) and thus to recapitalize.

According to the German economists, that maneuver could lead to new confidence on the part of many scared account holders who would return the savings they withdrew from the banks when the possibility of a departure from the euro loomed.

The creation of such a Bad Bank "would of course be costly," Mayer says, "but it would also reveal the true state of the economy" something that has been veiled by the European bailout funds and Central Bank intervention.

Greek banks are presently in large part dependent on emergency loans from its Central Bank. Many institutions are not eligible to receive funds from the European Central Bank because they don't have enough capital and aren't considered solid. According to Welt research, the volume of emergency loans in Greece now amounts to at least 75 billion euros.

The more Greeks close their bank accounts, the higher this amount climbs because the Central Bank is providing the missing resources to prevent banks from going under -- but it also means that the Bank is also presently financing further flight of capital from Greece.

Read the article in German in Die Welt.

Photo - dullhunk

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Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3


LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.

Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

If nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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