The Monday Briefing, written by Ian Stewart, Deloitte’s Chief Economist in the UK, gives a personal view on topical financial and economic issues.

* The uncertainties facing the euro area are numerous. This week’s Monday Briefing looks at one possible outcome for the single currency, of a country leaving the euro.


* Historically breakups of monetary unions have tended to be disruptive and traumatic. Yet every episode is different and it is possible to imagine many ways, some of them more benign than history suggests, in which the euro area might change.


* Much would depend on the degree of planning for an exit. An exit for which there had been careful preparation, and perhaps information sharing with the private sector, would be less disruptive than a rushed exit.


* Given that the euro crisis has been rumbling on for more than three years it would be surprising if contingency plans were not in place or, at least, being developed.


* This note examines how a single country might secede from the euro, leaving the other 16 member states to carry on. There are other, more radical possibilities, from the complete return of national currencies across all 17 member states to the separation of the euro area into two or more new currency zones.


* Secession has two attractions: it enables a country to devalue its currency and to write off much of its public debt. The hope is that a weak currency would restore competitiveness while default would provide an escape from years of fiscal austerity.


* But to get there the country would face great uncertainty, disruption and change.


* What follows is speculative but sheds light on the considerations involved in seceding from the euro.


* The decision to leave the euro might well be announced without warning late on a Friday evening once US markets were closed. The aim would be to act with stealth and limit capital flight.


* The seceding country would almost certainly have drafted a new currency law beforehand. It would be published, debated and agreed at an emergency meeting of the national Parliament over the weekend.


* Parliament would need to agree all the necessary details: the name of the new currency, its exchange rate with the euro, capital controls and the redenomination of all contracts and debts from the euro to the new currency. Banks and corporates would have to switch all bank accounts, wages, debts and assets into the new currency.


* If the exit had been planned well in advance new currency might be printed and available for distribution. When Slovakia broke away from Czechoslovakia in 1993, it emerged that it had started printing its own currency six months earlier. The money had been stored in a London warehouse and shipped to the newly created country once the breakup became official.


* Without such preparation, the central bank might launch an operation to stamp or mark all existing euro notes with the name of the new currency until new notes could be printed. As the Financial Times has noted, the logistics of issuing a new currency are formidable, “In 2003 the US-led coalition managed to do it in Iraq in less than three months. But that required the efforts of De La Rue, a British speciality printer, a squadron of 27 Boeing 747s and 500 armed Fijian guards to ease the process”.


* The current crisis has already led to significant withdrawals of capital from Greek and Spanish banks. This process would accelerate in the run up to an anticipated withdrawal from the euro. To prevent a further flight of capital, foreign exchange controls would probably be introduced over the weekend of any announcement. Indeed, it is possible that capital controls might be put in place before the announcement of secession. According to Reuters, EU officials are already discussing the imposition of border checks and capital controls in the event of a Greek exit.


* A bank holiday, possibly of several days, would be announced to prevent bank runs and provide time for the switch-over to take place. Withdrawal of euros from cash points would stop and electronic transfers of euros outside the country would be prevented. The borders might be sealed by the police and the armed forces to prevent people taking money out of the country.


* Corporates in a seceding country would face swings in the external values of assets and liabilities depending on the performance of the new currency on the foreign exchanges. Estimates of the scale of the likely devaluation of a new drachma vary, though published estimates range from around 40% to 80%. This would mean a sharp decline in the external purchasing power of consumers and corporates and rising inflation.


* Contracts written in national law such as for public sector wages or pensions could quickly be switched over to the new currency. But there would be possibly protracted legal disputes about contracts made in foreign law. Those outside the jurisdiction of the courts of the exiting country and payable outside the exiting country would be most likely to avoid conversion.


* Doubts about the stability of the new currency and an accumulation of euro notes and coins by households could encourage the development of informal transactions in euros or other foreign currencies.


* An exiting country would probably default on its euro debt and, unless it secured aid from the IMF, could face difficulties financing everyday public services.


* The disruption and uncertainty caused by secession would probably trigger a sharp contraction in GDP and a bout of high inflation in the exiting country. A well planned and executed exit would reduce the damage and increase the speed of recovery.


* For the European Central Bank the overriding aim would be to limit the degree of contagion to the rest of the euro area.


* Three years into the crisis a comprehensive solution remains elusive. Views on the probability of a country leaving the single currency change from week to week. But now the prospect has been raised it’s hard to see it disappearing quickly.




UK’s FTSE 100 ended the week 1.1% higher, with bank shares benefitting from the announcement of a boost in bank funding.


Here are some recent news stories that caught our eye as reflecting key economic themes:



* UK Chancellor George Osborne announced £100bn of new funding for the UK economy, including up to £80bn for banks in return for lending commitments – monetary easing

* The Governor of the Bank of England, Sir Mervyn King, warned that banks across the eurozone require “major recapitalisation”– banking stress

* Several US banks have begun exploring using a borrower’s intellectual property, including patents and trademarks, as collateral in the face of stricter capital requirements – banking stress

* Ratings agency Moody’s downgraded Spain’s credit rating to Baa3 from A3, one grade above “junk” bond status – Spain

* Spain’s 10-year borrowing costs briefly reached 7.0%, their highest level since Spain joined the eurozone – Spain

* Official data showed Spanish house prices fell 5.0% quarter-on-quarter in Q1 2012, and 12.6% year-on-year – Spain

* Moody’s announced that they would “review all euro-area sovereign ratings, including those of the AAA nations” if Greece left the eurozone – Greek exit

* Mario Monti, Italy’s prime minister, said he is “relaxed” about Italy’s finances and the country “will not need a bailout even in the future” – Italy

* Estimates suggest that Greek’s have been withdrawing up to €800m a day from banks in the lead up to the country’s general election – capital flight

* Soup kitchens run by the Greek Orthodox Church are now feeding up to 20,000 people a day in the Attica region of the country – Greece

* The President of the European Commission, Jose Manuel Barroso, claimed the European Union is now in a “social emergency” – eurozone crisis

* French retailer Carrefour, the world’s second largest retailer, announced that it is to sell its stake in its Greek joint venture in response to “challenges posed by the Greek economic context” – Greece

* The International Monetary Fund (IMF) called on Japan to take further measures to “tackle its deep-rooted fiscal problems” – Japan

* The combined UK pension deficit reached a record £312bn in May according to data from The Pension Protection Fund – ageing population

* UK car production rose to its highest level since 2004, according to figures from the Society of Motor Manufacturers and Traders (SMMT) – automotive growth

* Amancio Ortega, the Spanish founder of retailer Inditex SA, became Europe’s richest man, with an estimated fortune of $39.5bn – private wealth

* Silicon Valley Bank, the US hi-tech bank, opened its first UK branch in the UK, focused on offering loans to the UK tech industry – technology revolution

* India is set to become the world’s biggest beef exporter in 2012, in the form of water buffalo meat, meeting increased demand from emerging markets – emerging markets

* Tokyo deposed the Angolan capital city Luanda as the world’s most expensive city to live in as an expatriate – cost of living

* Valve, the maker of popular video games such as Counterstrike, has appointed an in-house economist to help manage the virtual reality economies that have grown in its games – growth market

* The organisers of the Nobel Prize announced that they would be cutting the prize money for winners by 20% due to the economic crisis – Nobel Prize

* The Argentinean government has started deploying tax inspectors armed with “dollar-sniffing dogs” in an attempt to crack down on unofficial foreign currency transactions – canine inspectors





Ian Stewart

Chief Economist

Deloitte LLP

Stonecutter Court, 1 Stonecutter Street, London, EC4A 4TR