Wednesday, April 28, 2010

Return of the drachma?

Readers will note that I think Greece will default. In a previous post I wondered whether they would also repudiate their external debt.

But there is a second option, which would be to exit the euro and unilaterally redenominate its debt (and all domestic debt) into drachma. This doesn't avoid default, but it does get Greece back to the status quo ante bellum, with monetary sovereignty and the freedom to inflate away its problems. 

Of course there is also a third option: default, repudiate, and redenominate. Argentina did this in 2001 and it worked.

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