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Greece’s Two Currencies
Greece’s Two Currencies
ATHENS – Imagine a depositor in the US state of Arizona being permitted to withdraw only small amounts of cash weekly and facing restrictions on how much money he or she could wire to a bank account in California. Such capital controls, if they ever came about, would spell the end of the dollar as a single currency, because such constraints are utterly incompatible with a monetary union.
Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges.
Consider a Greek depositor keen to convert a large sum of BE into FE (say, to pay for medical expenses abroad, or to repay a company debt to a non-Greek entity). Assuming such depositors find FE holders willing to purchase their BE, a substantial BE-FE exchange rate emerges, varying with the size of the transaction, BE holders’ relative impatience, and the expected duration of capital controls.
On August 18, 2015, a few weeks after pulling the plug from Greece’s banks (thus making capital controls inevitable), the European Central Bank and its Greek branch, the Bank of Greece, actually formalized a dual-currency currency regime. A government decree stated that “Transfer of the early, partial, or total prepayment of a loan in a credit institution is prohibited, excluding repayment by cash or remittance from abroad.”
The eurozone authorities thus permitted Greek banks to deny their customers the right to repay loans or mortgages in BE, thereby boosting the effective BE-FE exchange rate. And, by continuing to allow payments of tax arrears to be made in BE, while prescribing FE as a separate, harder currency uniquely able to extinguish commercial bank debt, Europe’s authorities acknowledged that Greece now has two euros.
…click on the above link to read the rest of the article…
The Fed’s Dollar Distraction
The Fed’s Dollar Distraction
In its September policy statement, the US Federal Reserve took into consideration – in a major way – the impact of global economic developments on the United States, and thus on US monetary policy. Indeed, the Fed decided to delay raising interest rates partly because US policymakers expect dollar appreciation, by lowering import prices, to undermine their ability to meet their 2% inflation target.
In reality, while currency movements can have a significant impact on inflation in other countries, dollar movements have rarely had a meaningful or durable impact on prices in the US. The difference, of course, lies in the US dollar’s dominant role in the invoicing of international trade: prices are set in dollars.
Just as the dollar is often the unit of account in debt contracts, even when neither the borrower nor the lender is a US entity, the dollar’s share in invoicing for international trade is around 4.5 times America’s share of world imports, and three times its share of world exports. The prices of some 93% of US imports are set in dollars.
In this environment, the pass-through of dollar movements into non-fuel US import prices is one of the lowest in the world, in both the short term (one quarter out) and the longer term (two years out), for three key reasons. First, international trade contracts are renegotiated infrequently, which means that dollar prices are “sticky” for an extended period – around ten months – despite fluctuations in the exchange rate.
Second, because most exporters also import intermediate inputs that are priced in dollars, exchange-rate fluctuations have a limited impact on their costs and thus on their incentive to change dollar prices. And, third, exporters who wish to preserve their share in world markets – where prices are largely denominated in dollars – choose to keep their dollar prices stable, to avoid falling victim to idiosyncratic exchange-rate movements.
…click on the above link to read the rest of the article…
Mexican Peso Dives, Fretting Begins About Peso Crisis
Mexican Peso Dives, Fretting Begins About Peso Crisis
“Everyone got used to playing with free, easy money. Now it’s going to cost us.”
On July 1, the Financial Times wondered just how low the Mexican peso could go, likening the ill-fated currency to a limbo dance: “Every month, it gets just that little bit lower.”
In the 20 trading days since, the peso has experienced eight record daily lows, in itself a record, even for Mexico. Not since the peso-dollar floating exchange rate system was established, on December 21, 1994, at the height of Mexico’s Tequila Crisis, has the currency notched up so many new lows in one single month. And there are still three days left to go!
At 16.25 pesos to the dollar currently, the peso has lost roughly 20% of its value against the dollar within a year. In December last year, with the exchange rate dropping to 14 pesos to the dollar, the country’s Exchange Rate Commission launched a currency intervention program in a bid to prop up the peso, or at least stymie its slide.
Like so many central bank interventions these days, it failed: by March, it took 15 pesos to buy a dollar. The Commission upped the ante, announcing it would conduct daily auctions of $52 million, without setting a minimum price requirement. That was four months ago. Since then, the peso’s value has continued to slide against the dollar, and the pain is beginning to show.
As El Financiero reports, although inflation, at around 3% , remains at historically low levels, pressures are beginning to rise. Some imported goods, including medical appliances, plastics and petrochemicals have registered price increases of between 10% and 15% over the last couple of months. With external trade accounting for 63% of the national economy, the impact is unavoidable. Particularly hard hit are companies with heavy debt loads denominated in dollars.
…click on the above link to read the rest of the article…
A PhD in Monetary Catastrophe
A PhD in Monetary Catastrophe
Editor’s Note: As you know, Bill believes the U.S. is about to experience a violent monetary shock. So today, we’re sharing with you a classic from the archives. It’s Bill’s firsthand account of Argentina’s monetary crisis. But as an American, you may eventually experience a very similar situation …
Cash Only
One of the things that vexes just about everyone in Argentina is money. The value of the peso changes rapidly. There is the official rate. And there is the unofficial rate.
Nobody knows what a peso is worth. Many people – including your humble editor – have to do some pretty serious calculating. The parts of his brain that do math must be swelling from overexertion.
“We need gas for the truck,” said Elizabeth yesterday.
“Well, I don’t have any more peso cash. Let’s put it on a credit card.”
“They don’t take credit cards. Cash only.”
“Then let’s pay with dollars.”
“Don’t be silly. That would cost us 50% more. He won’t give us a good rate.”
“Then let’s get some pesos at the ATM.”
“That’s just as bad … we’ll get the official rate.”
Let’s see: We want to pay in pesos, but only if we get the pesos at the unofficial rate. Otherwise, it’s better to pay in dollars, but only if the person on the other side will take the dollars at the “blue” or free-market rate.
Usually, you end up somewhere in between. If you try to bring money into the country, the government insists you trade it on the official market. But you can still work out trades at the “blue” rate – either by bringing physical cash into the country or by working with an unofficial money changer.
…click on the above link to read the rest of the article…
