Simon Calder: Making a drachma out of a crisis

The man who pays his way
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Expect the announcement just after 11pm, Athens time, one Friday evening. By that time, the financial markets in New York will have closed, so the European Central Bank and the government in Athens can get to work to extract Greece from the single European currency.

If you happen to be on holiday in Greece at the time, the process of making a drachma out of a crisis may make for a lively interlude. Unlike the years of preparation that went into the creation of the euro, Greece could have just 50 hours to change currency before the foreign-exchange traders in Tokyo start work on Monday morning; if it fails to do so, then the Greek government may well have to declare a week-long bank holiday.

Thankfully (from all points of view), I'm not an economist. And the financial markets offer no easy certainties. It's even possible that Greece could default on its debt without leaving the euro. But the unfolding Greek tragedy of international finance and domestic strife makes the following sequence of events plausible.

Firstly, the latest round of eye-watering austerity cuts fails to stick. The bailout money dries up. Greece defaults on its debts. The government in Athens concludes that only a devaluation can enable the country to rebuild; already rumours abound of vaults full of "new drachma" notes.

Greece's financial borders are sealed. Every Greek bank account is electronically converted from the euro to the new drachma at par, ie a citizen's savings of €500 are deemed to be worth 500 drachmae. When the financial system starts working again, ATMs will dispense drachma notes. And shortly afterwards, in this hypothetical chain of events, numismatists will have a new set of coinage to collect.

If those new coins and notes really were worth their face value in euros, the transformation would be of little concern. Archipelagos such as Bermuda and the Bahamas have their own currencies, firmly locked to the US dollar. But as soon as the foreign-exchange dealers get to work on Monday morning, the merciless market will find the appropriate level for the new currency – possibly as little as half a euro.

All of which is an awful prospect for the long-suffering Greek people who would see their savings shrink. But what about the tourists upon whom so much of the battered economy depends?

If it happens, those of us with a holiday booking to Greece this year could unwittingly benefit. A visitor who arrives after any devaluation would find prices for many local goods, notably food and drink, have fallen relative to sterling. And there would be a surge in Greek holiday bookings – partly because of the perception that the country is suddenly cheaper, but also due to the pent-up demand from people currently alarmed at the prospect of a euro-exit while they are in Greece. If it has already happened, they may feel more confident about booking.

ppp For anyone planning an imminent trip to Greece, may I suggest a couple of rudimentary insurance policies? First, you can offload your risk exposure concerning personal safety or wholesale disruption by booking a package holiday; the tour operator has a duty of care towards you. Next, cash is king. Credit or debit cards could temporarily stop working during a hasty change of currency if electronic banking freezes. In contrast, people with a wad of low-denomination euros will be the most popular folk in the taverna. The euro is a fundamentally robust currency, and will only get stronger if one or more weak economies falls out.

How the currency condundrum hit the Russian rouble

Conveniently, there is a model for how the process happens. When the Soviet Union fell apart in 1991, it comprised 15 republics divided by distance, prosperity and outlook, but united by a single currency. (Sound familiar?) From Lithuania on the Baltic to Vladivostok on the Pacific, and from the Arctic Ocean to the Black Sea, everyone traded with the rouble. True, it was not the symbol of mighty economy, being known by some long-suffering Soviet citizens as "a piece of paper entitling us to stand in line and be humiliated". But with the rouble you could queue for stale bread in Samarkand or Leningrad.

I happened to be travelling through the USSR in 1991 when it began to unravel. The tourism benefits were immense: border controls had yet to be introduced, which meant that with a single visa for a trip to Moscow you could hop happily through the Baltics. But as the union began to break apart, the rouble started to mutate. Ukraine – the second-biggest republic – overprinted theirs, which then dropped in value relative to the Russian variety. And everywhere, the currencies of choice were the US dollar, or better still the Deutschmark – for which, today, read the euro.