Friday, June 15, 2012

Lessons for Greece from the Czech-Slovak Currency Split

From the Prague Post:

Banker who headed breakup of former currency talks 'Grexit'

Lessons for Greece from Czech-Slovak split

Depending on whom you ask, the prospect of Greece leaving the eurozone is either a certain pathway to economic Armageddon or the answer to Europe's financial prayers.

Either way, it's a scenario that banks and politicians across the globe have admitted in recent weeks they are preparing for.

One man who knows all about preparing to leave a currency union is Pavel Kysilka, now chief executive of Česká spořitelna.

In 1993, after the "Velvet Divorce" saw the dissolution of Czechoslovakia into the Czech Republic and Slovakia, he was the man tasked with managing the currency split on the Czech side.

Kysilka believes there are lessons to be learned from how that process was handled - albeit with some provisos, not least the fact the Greek situation is playing out amid a Continent-wide debt crisis.

"The similarity is huge, but the situation in Greece is 100 times worse than it was in Slovakia," Kysilka told The Prague Post. 

In 1993, at first the Czech Republic and Slovakia planned to maintain a common currency, at least temporarily, but this was not to be.
Slovak individuals and firms, spooked by the belief there would be a currency split at some point, began funneling their money into the Czech Republic, where it would be worth more because of the country's stronger economy. The same thing is happening in Greece now, as Greeks move their euros out of the country to avoid seeing their life savings plummet in value if the drachma were reintroduced and subsequently devalued.

The outflow of cash from Slovakia became so serious in 1993 the leaders of both countries entered into negotiations to split the currency just weeks after the political split took place.

On Feb. 2, 1993, in a surprise announcement, politicians in both countries told their citizens the currency union would end six days later, marking the end of the Czechoslovak crown and the beginning of two separate currencies, the Czech crown and the Slovak crown.

The next day, all payments between the two republics stopped, capital controls were tightened and border controls were stepped up to prevent cash transfers between the two countries....MORE