Hyperinflation 2.0?

If you haven't heard, protests are breaking out in Zimbabwe and unpaid civil servants are going on strike. This sort of thing hasn't happened in many years.

It's possible to trace at least some of the motivation for these developments to monetary mischief. Over the last twenty years, no nation has suffered more problems with its money than Zimbabwe has. Everyone remembers the hyperinflation and subsequent dollarization in late 2008. The most recent episode has seen a nation-wide bank run break out as Zimbabweans queue at ATMs to withdraw U.S. dollars, the local currency.

Remember last year's Greek bank run? I'd argue that Zimbabwe's bank run is similar. If you recall, Greek depositors were worried that—in the event of a Greek exit from the Eurozone—their deposits would be redenominated from euros to a Greek version of the euro or even a new drachma. Better to cash out in good euros before getting stuck with something worse. Line-ups grew outside Greek banks until authorities had no choice but to shut the system down.

Like Greece, there is a decent chance that Zimbabwean bank deposits might be made payable in funny money, namely a Zimbabwean version of the U.S. dollar rather than the actual U.S. banknotes. This may explain why Zimbabweans have been desperately queuing up at bank machines—they want to cash out before the worst case scenario happens.

To understand what I mean by 'Zimbabwean version of the U.S. dollar', we need to take a quick tour of the Zimbabwean banking system. A nation's central bank usually runs the plumbing that connects local banks. These banks keep accounts at the central bank—in Zimbabwe's case the Reserve Bank of Zimbabwe (RBZ)—and use balances held in these accounts to clear and settle among each other. These accounts, along with central bank-issued banknotes, constitute a nation's supply of base money, the quantity of which determines its price level. When Zimbabweans spontaneously stopped using the local currency, the Zimbabwean dollar, in late 2008, RBZ accounts (and cash) became worthless. The RBZ-managed plumbing system had imploded.

Zimbabweans still needed to bank, however, so local banks soon began offering U.S. dollar accounts to clients. A new plumbing system was re-erected overseas; instead of maintaining clearing accounts at the now defunct Reserve Bank of Zimbabwe, local banks held U.S dollar accounts at banks in Europe and the U.S., otherwise known as nostro accounts. They used these offshore accounts to settle interbank Zimbabwe payments. [1]

To understand how this offshore plumbing system worked, say Joseph (who lives in the capital Harare) writes a cheque to Robert (who lives in Bulawayo). Joseph's local bank might settle the cheque thousands of miles away by having its New York bank wire funds to the nostro account of Robert's bank, which might be based in London. Circuitous, right?

As for cash, say Joseph wants to withdraw $100,000 in U.S. banknotes from his Zimbabwe bank account. His bank would request its New York bank to debit its nostro account by $100,000 and then ship the $100,000 in banknotes to Zimbabwe. Joseph now has a suitcase full of Ben Franklins.

This offshore plumbing system worked pretty well. However, it didn't take long for the RBZ to re-insinuate itself into the works by offering local banks U.S. dollar accounts. These accounts allowed the local banks to use the RBZ's re-christened real-time gross settlement system (RTGS) to settle interbank payments rather than using the offshore plumbing system. After having lost its printing press, the RBZ had got back into the monetary printing game. It had created a Zimbabwean version of the U.S. dollar.

My understanding is that as time passed the RBZ forced local banks to "repatriate" their clearing accounts from the overseas system and deposit them at the RBZ. In effect, local banks were told to wire U.S. funds from their foreign-based nostro accounts into an RBZ account held at a European/American bank. In turn, the local bank was credited with an equal quantity of U.S. dollar deposits on the RBZ's own books. Voila, local banks had gone from holding U.S. dollars in relatively safe foreign banks located in places like London to holding the domestic RBZ version of the dollar. I can't imagine that bank managers were terribly fond of this forced switch given the RBZ role in igniting the 21st century's first hyperinflation.

Let's see how this new system works. Now when Joseph wants $100,000 in cash, Joseph's bank—call it the Commonwealth Bank of Zimbabwe—has two choices. Use its foreign nostro account as before. Or it can ask the RBZ to debit the Commonwealth Bank RTGS account and provide the proper number of U.S. banknotes. The RBZ in turn sources the cash by requesting its foreign bank to debit the RBZ account—now plump with confiscated dollars—and send the cash to Zimbabwe by plane. The RBZ's overseas dollar accounts in effect "back" the dollar deposits that the RBZ has issued to local banks.

On paper this sort of system should work fine... as long as the RBZ doesn't abscond with the funds in the foreign bank accounts. Unfortunately, this may be exactly what happened. The RBZ had effectively gone from being bankrupt to having amassed large amounts of U.S. funds overseas. This proved tempting, and according to former finance minister Tendai Biti the regime began dipping into the RBZ's foreign stash to pay for expensive junkets and to finance public sector salaries. The upshot it that there may not be enough U.S. funds in the RBZ's foreign accounts to back its promises to local banks.

This means that now when Zimbabweans go to their banks to get U.S. cash, the banks—which before had no problems meeting these requests via their nostro accounts—are hamstrung. They have U.S. dollar accounts at the RBZ but the RBZ is unable to draw on its depleted overseas accounts to get the requested cash. The lineups that have developed are the public's attempt to squeeze out whatever spare dollars remain in the system, an attempt that is rendered much hard given the withdrawal limits that have been instituted to slow down the run.

Zimbabweans are already starting to see a divergence between the price of an electronic dollar and a paper dollar. Various media reports say the practice of "cash burning" has re-emerged for the first time since the hyperinflation of 2007-08. Anyone who needs to convert deposits into cash, frustrated by long lines at ATMs and withdrawal limits, can instead approach an informal dealer who offers to buy their deposits at a discount of 10-20% of their cash value (see here and here). Think of the 'cash burning' discount as the market value of an RBZ-backed bank deposit. If the regime has indeed wasted all the money in its nostro accounts, this discount will only widen.

The theory that the regime has absconded with the RBZ's overseas funds is consistent with a flurry of official proclamations over the last month or two. If the RBZ is indeed bankrupt, it would make sense for the ruling regime to adopt the same strategy that Greece did last year; implement capital controls to trap as many U.S. dollars in the banking system as possible, thus limiting the damage and buying time for the government to rebuild the balance sheets of both the RBZ and the local banks before reopening for business. This would probably require some sort of loan from China or elsewhere. Under this scenario, Zimbabwean deposit holders could very well have to take a large haircut.

As in Greece, the RBZ has started to ring-fence the system by instituting daily withdrawal limits (of around $100); enough to allow Zimbabweans to get by but not enough to hurt the banking system. To coax people into accepting electronic dollars rather than paper dollars, the central bank has suddenly decreed much lower fees on bank payments and transfers. The government has also invoked the Bank Use Promotion and Suppression of Money Laundering Act, which punishes citizens and business if they refuse to deposit their money in banks. More radically, it has imposed severe import restrictions on a broad variety of goods from furniture to beans to fertilizer, a policy that presumably prevents cash leaking over the border. Together, all these regulations seem designed to help stuff as many U.S. banknotes back into the RBZ as possible.

Alternatively, it's possible the Zimbabwe government cribs from the Argentina play book and sets up a corralito, or coral, followed by a redenomination of dollar accounts into the local unit. Unlike Argentina, which had pesos, Zimbabwe is fully dollarized and doesn't have its own paper currency in which to redenominate deposits. But so-called bond notes (which I wrote about last month), an issue of paper money set to debut this fall in denominations of $2, $5, $10 and $20, may be a step in the Argentinean direction. Rather than meeting conversion requests by providing U.S. dollars, the RBZ will be able to print off any quantity of bond notes it deems necessary. In this way U.S. dollar claims on Zimbabwean banks will cease to be payable in actual dollars but in the RBZ's peculiar brand of U.S. banknotes, probably worth far less than the real thing.

It seems perverse that Zimbabwe could see another hyperinflation while on the very dollar standard that was meant to immunize it from a hyperinflation scenario, but I'm starting to worry this could happen. Consider that Robert John Mangudya, the head of the RBZ, claims that retailers are beginning to put two different price tags on one product, a higher one for electronic payments and a lower one for cash. If the RBZ-issued electronic dollar continues to inflate then electronic dollar sticker price will rise but the U.S. paper dollar price will stay constant. This second set of prices would at least provide some modicum of price stability to the nation.

Not so fast. Mangudya warns that the central bank will prosecute any retailer that sets two prices. If retailers comply and set only one price for their wares, that effectively undervalues U.S. banknotes and overvalues RBZ-issued U.S. electronic dollars. Gresham's law will take hold as shoppers use only bad electronic dollars to pay for things while hoarding their good, and undervalued, paper dollars in their wallets. Unwilling to be the dupes and accumulate overvalued and unwanted electronic dollars, retailers will have no choice but to jack up their prices, essentially adopting the RBZ U.S. e-dollar as the standard unit of account, or unit in which they set prices. With U.S. dollars no longer being used as a medium of exchange and unit of account, price stability in Zimbabwe will cease to exist.

One hopes that rumors that the regime has absconded with the RBZ's funds are false and that the current bank run and potential inflation is just a temporary spate of animal spirits. But in my experience, most sustained bank runs are underpinned by something real.


[1] I get much of this information from here.

Why big fat Greek bank premiums?

National Bank of Greece depository receipt certificate (source)

If you're like me and you like to: 1) explore anomalies in markets; and 2) mix equity analysis with monetary analysis, then you'll like this post. A sneak peak: by the end, we'll be able to use equity markets to figure out the unofficial exchange rate between a Greek euro and non-Greek euro.

For the last few weeks shares of Greek banks have diverged dramatically from their overlying depository receipts (see chart below). A bit of background first. A depository receipt is much like an exchange-traded fund, except where an ETF holds a bundle of different stocks, a depository receipt represents just one stock. That stock is usually listed on an out-of-the-way market (like Greece), whereas the depository receipt trades on a major exchange like New York. Investors interested in owning a foreign stock can avoid currency conversion costs and foreign settlement problems and instead purchase the New York-listed depository receipt hassle-free.

In general, the parent security and its offspring should trade in line with each other. Recently, however, the US-listed depository receipts of the National Bank of Greece and Alpha Bank have risen to a massive premium relative to their Greek-listed parents. For instance, in mid-August investors could have bought National Bank's New-York listed depository receipt for €0.73. However, the Greek-listed stock was trading for just €0.60. For some reason, investors are paying 30% more for a security that provides the exact same stream of earnings. We've got a gross violation of the law of one price.*

This is especially interesting given that a redemption/creation mechanism for depository receipts links the price of parent and offspring via arbitrage. In the same way that an investor deposits cash at a bank and gets a bank deposit, an investor can buy a National Bank of Greece share listed in Athens and 'deposit' that share at a custodian, receiving in return a newly-created New York-listed depository receipt. If either security can be bought for less than the other, an arbitrage opportunity arises. For instance, in mid-August one might (in theory) have bought Greek-listed National Bank of Greece shares for €0.60, converted them into New York-listed depository receipts, sold the depository receipts for €0.73, wired the proceeds from New York to Greece, and repurchased Greek-listed National Bank of Greece shares for €0.60. Rinse and repeat. (This works the other way, too. In the same way that a bank deposit can be converted into cash, investors can purchase a depository receipt and redeem it for underlying equity.)

The effect is that as investors clamour to harvest arbitrage gains, any premium or discount between a New York-listed depository receipts and its Greek parent equity should quickly fall towards zero. Why hasn't this been the case in Greece of late?

There are several explanations for persistent premia/discounts between depository receipts and their underlying shares. The first is liquidity differences. If the depository receipt is more liquid than the underlying equity, then investors will be willing to pay a bit more for the depository receipt. In the case of National Bank of Greece, the depository receipt tends to attract higher trading volumes than the underlying Athens-listed shares, which probably explains why the receipts have tended to trade at a premium.

Premiums or discounts can also occur when the redemption/creation mechanism is inhibited. Depository receipts for Taipei-listed Taiwan Semi Conductor rose to an incredible 60% premium to the shares in the late 1990s and early 2000s. The reason for this premium can be traced to the fact that Taiwan restricts foreign ownership of local companies. This effectively prevented the closing of the premium via purchases of local shares for conversion into depository receipts. These premia evaporated when Taiwan removed foreign ownership restrictions in 2003. (Here is a good summary).

In a 2006 paper, Saxena found that the New York-traded depository receipts of a handful of Indian stocks, including Infosys, Wipro, State Bank of India, MTNL, ICICI Bank, HDFC Bank and Satyam Computers, habitually traded at substantial premium to the underlying Indian-listed equity. Infosys's premium (which reached 60% in 2002) had existed since its U.S. listing in 1999. However, German, South Korean, and Hong Kong-listed companies with New York-listed depository receipts showed negligible premia.

Why was this? Saxena found that Indian depository receipts suffered from limited two-way fungibility. Depository receipts could be freely converted into Indian-listed shares, but Indian-listed shares could only be converted into depository receipts to the extent that there was available 'head room'. The amount of headroom in turn depended on the extent of past conversion of depository receipts into shares. Since headroom in the above shares had been all used up, when American investors flocked to buy depository receipts, thus driving them to a premium relative to the Indian-listed equity, there was no way for arbitrageurs to close the difference.

In the case of Greece, the imposition of capital controls on June 29 seems to have inhibited the redemption/creation mechanism. The Athens stock exchange was closed the same day (the New York-listed receipts continued to trade), but when it reopened on August 3, capital controls remained in place. Since reopening, a wedge has appeared between the prices of National Bank of Greece's depository receipts and its underlying shares, implying that there has been much more demand for the former than the latter. Typically, arbitrageurs would close this gap, buying the underlying Athens-listed shares and turning them into new deposit receipts. Presumably the Greek authorities have asked that banking intermediaries cease allowing the conversion of Greek shares into receipts, so arbitrage has not been possible.

That ended on August 27, 2015. According to a press release for BNY Mellon, clarification requested from Greek authorities regarding conversions of depository receipts had finally been received and, as a result, deposit receipt books would be re-opened for issuance and cancellation. With the ability to arbitrage receipts and the underlying shares once again available, the National Bank of Greece depository receipt premium collapsed from around 30% to 10% when markets opened on August 28. It has been shrinking ever since and now lies within its historical range.

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That explains the anomaly and its disappearance. But that's not the end of the story. Going forward, watching the relative price of National Bank of Greece's depository receipts and its share price may provide valuable insights.

In permitting depository receipt redemption and creation, the Greek government has effectively removed capital controls. Currently, Greeks cannot withdraw more than €420 in cash per week from their bank accounts and are not permitted to transfer more than €500 per month to a foreign account. Businesses must go through tedious application processes to get access to their funds. However, with the depository receipt window open, businesses and individuals can simply spend all their bank deposits on Athens-listed National Bank of Greece, convert the shares into depository receipts, sell them in New York for dollars, and convert the funds back to euros. Voila, capital controls evaded.

This loop hole doesn't seem very fair to me. After all, only the financial elite will be aware of the depository receipt escape, with widows, orphans, and the rest oblivious that capital controls have been effectively lifted. Loosening up the depository receipt window only make sense if it is twinned with similar effort to help the broad public, say a higher ceiling on cash withdrawals.

Depending how tightly Greece's capital controls bind, Athens-listed National Bank of Greece shares might actually lose their traditional discount and rise to a premium relative to New York-listed depository receipts (in euro terms). If depository receipts are the best route to evade capital controls, then those desperate to get their money out of Greece will be willing to pay a 'fee' for that privilege. By purchasing National Bank of Greece shares in Athens for, say 0.65 euro, and converting them into depository receipts that trade for just 0.60 euros, investors effectively lose 0.05 euros. The size of that fee, the premium, will equal the cost of the next best alternative for evading capital controls. If controls are leaky, the premium will be small. If they aren't, it could be quite wide.

A number of studies have found that during the Argentinean corralito, Buenos Aires-listed shares rose to a huge premium relative to their New York-listed depository receipts. Brechner, for instance, finds that the premium reached over 40% in January 2002. This gap represented the amount that Argentinians were willing to pay to use depository receipts as a vehicle for moving their wealth from frozen Argentinean bank deposits into liquid U.S bank deposits. When share conversions were restricted in March 2002, that premium disappeared.

Greece seems on its way to being mended. Capital controls should be loosened soon, and people no longer seem anxious about an imminent drachma conversion. So if a premium on local National Bank of Greece shares were to develop, I doubt it would be large like the sort of premia that prevailed in Argentina. However, if things were to get worse, we might see a large gap develop.

In closing, now that depository receipt conversion has been reopened but capital controls remain in place, the exchange rate between Athens-listed National Bank of Greece shares and New York-listed depository receipts serves as the "black market" rate between Greek euros and non-Greek euros. After Hugo Chavez imposed capital controls in 2003, Venezuelans used the rate between Caracas-traded CA Nacional Telefonos de Venezuela (CAN TV) shares relative to New York-listed depository receipts as a shadow rate for the Venezuelan bolivar, until CANTV was nationalized in 2007. Likewise burdened by capital controls, Zimbabweans used the exchange rate between Old Mutual shares listed on the Zimbabwe Stock Exchange and those listed in London as the implicit Zimbabwe dollar exchange rate. It even had a name: the OMIR, or Old Mutual Implied Rate.

So watch the National Bank of Greece equity-to-depository receipt rate closely. It's conveying information about Greek euros.


* More accurately, the depository receipts were trading for US$0.83. To calculate their euro price, I use the 9:30-10:30 price of New York-listed National Bank of Greece depository receipts and converted them into euros at the prevailing dollar-to-euro exchange rate.

Stock as a medium of exchange

American Depository Receipt (ADR) for Sony Corp

You've heard the story before. It goes something like this. There's one unique good in this world that serves as a universal vehicle by which we conduct every one of our economic transactions. We call this good "money". Quarrels often start over what items get lumped together as money, but paper currency and deposits usually make the grade. If we want to convert the things that we've produced into desirable consumption goods (or long-term savings vehicles like stocks), we need to pass through this intervening "money" medium to get there.

This of course is fiction—there never has been an item that served as a universal medium of exchange. Rather, all valuable things serve to some degree or other as a medium of exchange; or, put differently, everything is money. What follows are several examples illustrating this idea. Rather than using currency/deposits as the intervening medium to get to their desired final resting point, the people in these examples are using a non-standard intervening media—specifically, listed equities—in order to move from an undesired currency to a preferred currency.

Zimbabwe and Old Mutual

In the midst of the Zimbabwe hyperinflation I began to toy with the idea of purchasing Zimbabwean stocks. The market value of the entire Zimbabwe Stock Exchange had collapsed to a fraction of its Zambian and Botswanan peers, and picking up a few bellwether names might provide some value, went my thinking. The difficult part was buying the Zimbabwean dollars necessary to build my position. Selling my Royal Bank deposits (I live in Canada) for deposits at a bank in Zimbabwe, say Barclay's Bank Zimbabwe, would not only take a long time to complete, but I'd end up having to pay the official rate for Zimbabwe dollars, which was far below the market rate. The losses on this forex conversion would destroy any opportunity for a profit on the shares.

There was an alternative route. I could sell my Royal Bank deposits for shares in a firm called Old Mutual, listed on the London Stock Exchange. The kicker is that Old Mutual had (and continues to have) a listing on the Zimbabwe Stock Exchange. Using a stockbroker in Zimbabwe I could have transferred my London-listed shares to the Zimbabwe Stock Exchange, sold the shares, leaving Zimbabwe dollars in my brokerage account. Since the ratio of Old Mutual in London and Zimbabwe was free to fluctuate (unlike the official exchange rate), I'd effectively be purchasing Zimbabwe dollars at the correct market rate, not the overvalued official rate.

Next I could have used my Zim dollars to buy the Zimbabwe-listed stocks that I wanted. When the time came to get out, I could have sold my shares for Zimbabwe dollars, repurchased Zimbabwe-listed Old Mutual shares, had my broker 'uplift' those shares over to the London stock exchange upon which I would once again sell Old Mutual for British pounds, eventually ending up with my Bank of Montreal deposits.

What an incredible chain of transactions! Which explains in part why I chickened out. Nevertheless, the example illustrates the necessity of having an appropriate and non-standard "medium of exchange", in this case Old Mutual, in order to shift from one brand of "money" deposits to another to another.

ADRs and the Argentinean Corralito

A similar example played out during the Argentinean corralito of late 2001 and early 2002. In early December 2001, in an effort to prevent massive capital outflows, Argentinean authorities established financial controls which, among other restrictions, imposed a ceiling of $1,000 a month on bank withdrawals. This became known as the corralito, the diminutive of corral, or animal pen. With a devaluation imminent, and even worse, pesofication—the forced conversion of bank deposits from USD into pesos—Argentineans could only sit helplessly as their frozen deposits awaited their doom.

Argentineans quickly found a way to evade the corralito. While they could only withdraw limited amounts of dollars from their bank accounts, they were allowed to buy any amount of stocks listed on the Buenos Aires stock exchange. Since stocks would be protected from the ensuing devaluation and pesofication, a mad rush into the markets ensued along with a terrific rise in share prices.

Snipped from Auguste et al, 2005.

What is interesting is that certain Buenos Aires-listed stocks were adopted as a convenient medium for escaping Argentina altogether. Here's how. An asset class called the American Depository Receipt, or ADR, trades on the New York Stock Exchange. ADRs are market-listed securities that represent an underlying batch of non-US shares. The way an ADR works is that a U.S. custodian bank will issue an ADR to an investor after the underlying shares having been deposited in a foreign depository bank where they will be held for safekeeping. An owner of ADRs enjoys all the economic rights (dividends, votes, capital appreciation) as the underlying shares held in deposit.

A number of Argentinean names traded on ADR form in New York, including a Banco Frances ADR and a Telecom Argentina ADR. During the corralito, an Argentinean could buy an Argentinean stock that traded on the Buenos Aires Stock Exchange, say Telecom Argentina, and immediately deposit these shares with a local depository. The shares having been deposited, a U.S. custodian bank would create an overlying ADR for the Argentinean investor. Since these ADRs were traded in New York, the Argentinean could turn around and sell the ADR for U.S. dollar deposits. Telecom Argentina shares and its linked ADR had become a medium of exchange of sorts, allowing Argentinean investors to convert from one brand of money, pesos, into another, US dollars.

Canada: Norbert's Gambit

Nor is the use of equity as a medium of exchange solely a phenomenon of crisis economies like Zimbabwe and Argentina. Enter Norbert's gambit. The name comes from Norbert Schlenker, an investment advisor in B.C. who popularized the technique. Canadian discount brokerages charge around 1.5% on forex conversions, which is a lot. Norbert's Gambit is a cheaper way to convert Canadian dollars to U.S. dollars and back.

The gambit works this way. Horizons US Dollar Currency ETF, which holds very short term US debt, trades on the Toronto Stock Exchange in US dollars under the ticker DLR.U as well as the ticker DLR, which is quoted in Canadian dollars. Investors can spend Canadian dollars in their brokerage account to buy DLR, convert those units to DLR.U, and then sell those DLR.U units for US dollar deposits. Voila, they've used an ETF as a medium to move from one "money" to another.

Interlisted stocks like Royal Bank or Potash Corp, which trade on both the Toronto and New York markets, can also be mobilized for Norbert's Gambit.

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Norbert's Gambit, the Old Mutual switch, and the Argentinean ADR evasion are only a few examples of things that we normally don't consider to be "money" being mobilized as media of exchange. But these three are just the tip of the iceberg. Consider the fact that everyone who acts as a dealer in goods or securities is using these items as an exchange medium. Just as someone builds up a stock of cash for eventual future exchange, a t-shirt dealer purchases an inventory of t-shirts for future sale.

It's not just t-shirts. Every dealer from the gas utility to the car lot owner to a market maker in a small cap stocks uses the particular good in which they specialize—natural gas, cars, and penny stocks—as their medium of exchange. Some media are more general than others and will tend to appear in a larger proportion of transactions, but this doesn't make them qualitatively different from those that are less general. Put differently, there is no such thing as a valuable good that does not function as a medium of exchange: rather, there are only good media of exchange or bad ones.

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References:

There is a body of academic work on the Argentinean corralito, stock prices, and ADRs

1. Melvin, 2002., A Stock Market Boom During a Financial Crisis: ADRs and Capital Outflows in Argentina
2. Yeyati, Schmukler, & Van Horen, 2003. The price of inconvertible deposits, the stock market boom during the Argentine crisis.
3. Auguste et al, 2005. Cross-Border Trading as a Mechanism for Implicit Capital Flight: ADRs and the Argentine Crisis.
4. Brechner, 2005. Capital Restrictions as an Explanation of Stock Price Distortions During Argentine Financial Collapse: December 2001 – March 2002.
5. Lam, 2011. New Evidence on the Wealth Transfer during the Argentine Crisis.

No work has been done on Old Mutual and the Zimbabwean hyperinflation.

Greece is no Argentina

Paul Krugman compares Greece to Argentina. Devaluation in Argentina surely helped, and so would it in Greece. But there's a problem. See my comment:

The comparison to Argentina is a poor one. Argentina's central bank was a fully-operational currency issuer when it lifted its peg, and the peso already circulated along with dollars.

Greece's central bank is currently in-operational as a currency issuer; drachmas simply don't exist.

Should the Bank of Greece try to relaunch itself, will its drachma liabilities be voluntarily accepted as mediums of exchange? Probably not, for the same reason its bonds are worthless. Like the Greek government, the BoG simply has no credit. Compounding this is the fact that already-existing euros circulate in paper form, and the fact that so many Greeks have accounts in German banks they can use for payments. Given this broad array of payments choices, the free drachma will be stillborn.

Nor can drachmas be forced into circulation. A country that can't enforce tax laws can't enforce legal tender laws. No, the drachma won't be reappearing any time soon.

Krugman assumes that the euro is like a glove. You can put it on and take it off easily. In actuality the Euro is more like a Chinese finger-trap. It's easy to put on, but once you're in, getting out is well night impossible. As attractive as devaluation is, that's not the core issue. There simply is no way to get from here to there.

Greece will either stay in the Eurosystem, or will try to leave and end up with euro anyways. The latter is informal euroization.

On the problem of ensuring the acceptability of a new fiat money, see George Selgin.