Jennifer Rigby in Prague
July 2, 2012
If you believe the headlines, if Greece exits the euro it will be cataclysmic, earth-shattering and quite possibly the end of the economic world as we know it. But this isn't the first time a country has left a currency union; in fact, according to research by London firm Variant Perception, there have been 69 currency exits in the last century. Moreover, these exits did not lead to the financial Armageddons some commentators are currently predicting for the Eurozone – in many examples, the countries actually started growing again relatively quickly.
So even though the pro-bailout New Democracy party won the June 17 elections, few believe the possibility of a Greek exit from the euro, or Grexit, has gone away, and it's worth asking whether there are any lessons from history that could help the country navigate an expulsion from the euro (and in the subsequent stories in this Special Report what possible effects such a thing would have on the countries in Central and Eastern Europe).
A growing number of experts believe there are lessons to be learned. Indeed, the man who handled the split of the Czech and Slovak currencies in the 1990s, Pavel Kysilka, has already had phone-calls from the International Monetary Fund in Washington to check on what he is up to at the moment.
Speed is of the essence
While there are obviously major differences between the two splits – not least that the Czechoslovakian split was not taking place amid a continent-wide debt crisis – at the very least, there are practical lessons to be learned, including the fact that you may need helicopters on standby, armed guards and around 40,000 people to pull it off successfully. Kysilka, now chief executive of the Czech savings bank Česká spořitelna, was in charge of proceedings on the Czech side of the split. He said speed and secrecy were both key, to prevent public panic. "The split took place under an urgent time-scenario," he says. The Czech Republic and Slovakia became separate countries on January 1, 1993. At first there were plans to maintain a common currency, at least temporarily, but this was not to be. Slovak individuals and firms, spooked by the belief that there would be a currency split at some point, began funnelling 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 re-introduced in place of the euro, and subsequently devalued.
The outflow of cash from Slovakia became so serious that the leaders of both countries were already in secret negotiations to split the currencies as early as mid-January. And on February 2, 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. Over the next few days – Thursday to Sunday – the old Czechoslovak currency was exchanged for the new currencies, which became legal tender on February 8. To save time, old Czechoslovak notes were stamped with either Czech or Slovak identification to mark them as the separate currencies.
People were encouraged to deposit their money in the banks, with limits on withdrawals imposed. They were allowed to transfer 4,000 crowns in cash. All of the transfers were done on a 1:1 basis, meaning that one Czechoslovak crown was worth one Slovak crown or one Czech crown. "The stamps had to be pre-printed in Latin America and then transported by sea in boxes, and secretly stored in the safe of the Czech National Bank," recalls Kysilka. "When the workers asked what it was, we told them it was gold, so they did not need to pay attention to it – so they did not, even though the stamps were so very valuable."
The logistical operation was massive. "We had to find people who would stamp hundreds of millions of bank notes... The army was assisting, as well as the police rapid deployment team. All in all, there were 40,000 people involved. We had a 24/7 dispatching centre, helicopters, and thousands of cars available," he says.
The exchange was completed in just four days, with similar processes taking place in Slovakia. Banks and post offices had extended hours to accommodate savers, some with armed guards, and the notes exchange took place over the weekend. In the modern world, this process would probably also include a banking system shutdown, including a blackout of internet banking websites to prevent last-minute transfers. "The scenario is simple in principle – but it is very difficult not to botch it. If you give it to professionals, they won't, but if you give it to politicians, they will," says Kysilka.
Later in the year of the split, both countries printed their new currencies to replace the stamped notes. As the Slovaks had feared, the Slovak crown was devalued. However, in the longer term, the split and the autonomy it provided worked out well for both countries, with both economies experiencing growth over the 1990s. Kysilka believes an exit from the euro, and a subsequent devaluation of the Greek currency, is the only option for the Eurozone. However, he acknowledges that it is not going to be easy. "The similarity is huge, but the situation in Greece is a hundred times worse than it used to be in Slovakia," he says.