How would Greece leave the Euro?

Under the treaties establishing the Euro, Greece cannot just simply exit. The arrangements do not contemplate how a country might leave the Euro. Therefore Greece would have to negotiate its exit with all the other members of the Euro.

But in the real world Greece is not likely to spend months negotiating a Euro exit. It would simply announce that it was leaving.

Exactly how Greece would exit and replace Euros with Drachmas is uncertain. A likely scenario is:

  • Greece announces its exit outside of European trading hours.
  • A bank holiday is taken in Greece to give time for conversion to an interim arrangement.
  • Capital/exchange controls are introduced to prevent withdrawal of Euros from Greece.
  • Mandatory conversion of Euro deposits in Greece into Drachmas takes place at a fixed exchange rate. That exchange rate might be a fixed 1:1 (i.e. no immediate devaluation), or it might impose an immediate devaluation.
  • Emergency legislation is introduced in Greece to deal with the change from Euros to Drachma. This is likely to address the impact on contracts, stipulating that all references to Euros in contracts are changed to Drachma and that that currency conversion is not in itself a force majeure.
  • Introduction of a new physical currency - a logistical headache. Greece might already be stockpiling Drachma notes (commentators suggest that it would take three months or more to print a new currency). It may also find that existing Euro notes are over printed or, if the old Drachma printing plates are still in existence, interim Drachma notes are printed.
  • The remaining members of the Euro will need to consider how to react. That might include an emergency bank holiday to allow a more orderly response, and possibly emergency legislation to try to manage the transition.
  • The UK and other major financial centres may also have an emergency bank holiday and introduce emergency legislation.
  • Capital/exchange controls in Greece will at some point be dropped/relaxed - this will lead to an immediate devaluation of the Drachma. Commentators have speculated that there could be a 30% depreciation.

What does all this mean for my existing contracts where I sell to Greece?

Case study

The seller is a UK company which has a contract to sell goods for delivery in Greece to a Greek company. The contract is denominated in Euros and it is subject to English law and English court jurisdiction. Greece exits the Euro and introduces the Drachma, which leads to a heavy devaluation. The Greek buyer, which has most of its assets in Greece, seeks to pay in Drachmas.

The UK seller will naturally prefer to be paid in Euros, otherwise it has effectively agreed a substantial discount. What's the legal position?

  • Any dispute would initially be heard by an English court.
  • The English court will take account of any emergency English law that has been introduced on Greece's exit.
  • Assuming there is no relevant English emergency laws, the court will need to think through the following: Is the payment due in Euros or has it been effectively amended to refer to Drachma by "lex monetae"?
    • "Lex monetae" is a legal concept that establishes that a country is entitled to determine what its currency is. In this situation, it would mean the English court might look at Greek law to determine what the position is - that could result in the Drachma being imposed. However, it is not clear if English courts would impose the Drachma - after all, the Euro continues to exist.
    • Is the change from Euros to Drachma a "force majeure"? This will depend on exactly what the contract says. Certainly a currency change is likely to be "an event outside the reasonable control" of the parties (the usual definition of force majeure). However, the courts hesitate to allow problems with payment to be a force majeure. After all, the Euro still exists.
  • It's likely (but not certain) that the courts would not find a currency change for a sale of routine goods to be a force majeure (but that could be different where the currency is fundamental to the contract - e.g. foreign exchange futures, or where exchange controls prevent any payment).
  • It is uncertain what an English court would decide. We expect that English courts will tend to uphold the contract as payment in Euros, given that the Euro continues to exist, but at the very least there is plenty of room for mischief and argument.
  • However, the buyer has all of its assets in Greece and therefore to enforce payment in Greece would require taking the English court judgement and enforcing it in a Greek court. The Greek court could well decide, on public policy grounds, to override an English court decision and impose a change to Drachmas. So, having won in the English courts, the seller then in effect loses when it enforces in Greece.

But do not forget the credit risk - i.e. will the Greek buyer pay at all? Ultimately that is more significant than the legal risk outlined above.

As the above case study shows, there is a significant risk that Drachmas could be imposed on a contract. However the degree of that risk will vary depending on the situation - two contrasting examples:

  • A UK seller selling goods to a US buyer in Euros for delivery to Greece, where English law applies, will have a lower risk of Drachmas being imposed.
  • A UK seller selling to a Greek buyer in Euros, subject to Greek law, is more likely to have Drachmas imposed.

What does this mean for my existing contracts where I buy from Greece?

The same legal risks outlined above in relation to sale contracts will still apply. However, a Greek supplier will probably be keen to receive payment in Euros rather then Drachmas. Greek law will also be less relevant, as there will be no need to enforce in Greece. So, overall, it is more likely an English court will decide that Euros apply. But again that is not certain, and it will depend on any emergency English legislation introduced, as well as the various specifics of the contract.

Key factors to assessing risk for existing contracts

Click here to see the table.