Any 'new drachma' would sink like a stone at first

By Patrick Graham

LONDON (Reuters) - If a 'No' in Sunday's referendum eventually takes Greece out of Europe's single currency, any "new drachma" or temporary payment unit could be worth as little as a fifth of the euro now in circulation.

In the absence of a flow of new euros from the European Central Bank after a "Grexit", Athens' existing stock of hard currency is not expected to be enough to cover the government's obligations.

Currency experts say that would probably force the state to print some form of interim IOUs or "scrip" to pay wages and pensions and the purchasing power of this on the street or overseas would be a direct proxy for a new currency.

Crude estimates of the sort of devaluation the Greek economy would need to regain international competitiveness are at least 25-30 percent, according to studies by several bank and research firms published over the past six months.

But the likely chaotic financial aftermath and public and private sector defaults would almost guarantee that extending to as much as 80 percent, experts say.

In effect, that means all euro debt or import payments for the government, companies and households would soar at a time when total private and public sector debt is already estimated at three times Greece's roughly $240 billion (154 billion pound) annual GDP.

"The way you have to look at this is to say it is an FX regime change," JPMorgan's head of FX, commodities and international rates strategy, John Normand, said.

Judging by previous currency regime changes - including Russia or Indonesia in the 1990s and more recently Argentina and Iceland - he said that pointed to a range of depreciations of between 40-80 pct. https://goo.gl/TwqURf

LABOUR COSTS

Normand said that one thing that may cushion a new drachma's fall is the huge drop in Greek domestic demand and spending over the past five years, which has already delivered the economy a current account surplus.

"Regime changes tend to come from countries that have these unsustainable balance of payments positions, big current account deficits," he said. "Greece, since (it is) 5 years into a depression, is at least more balanced from that perspective."

The more detailed economic work on what is needed to restore competitiveness, or create the conditions under which Greece's private sector will generate enough growth to rebalance the economy, also varies in approach.

Some compare the rise in relative labour costs since Athens took the plunge into the euro in 2001. That increase has dropped off from roughly 40 percent in 2011 to around 10 percent at the end of last year, but is also likely to have been skewed by the huge cuts in demand and employment in the past three years.

Others look at how the costs of its major exports have risen in comparison with international competitors in sectors such as food, tourism and shipping in which Greece specialises. That is now about 15 percent but, again, an imperfect measure.

"We estimate that the drachma would need to fall by about 30 percent in nominal terms to regain competitiveness, although the fall would probably be significantly larger in the short term," advisory group Oxford Economics economist, Ben May, said.

"We would not be surprised if initially the fall was twice as large."

SCRIP OR SAVE

A number of economists whose experience dates back to the multi-currency Europe of the 1980s and 1990s, and a series of emerging market currency crises since, say that the drachma was likely to be extremely volatile.

They describe a period of 18 months or longer where the government, by paying pensions and benefits in drachmas, fights to shift more of the economy back into a currency which Greeks on the street will instinctively not want to receive.

"The euro is going to remain the de facto currency for some time to come," Commerzbank's Peter Dixon said.

"The sensible strategy will be to put a big devaluation in place to start to compensate for 15 years without one. But it will be a messy transition, that much is clear."

UBS global economist, Paul Donovan, laid out detailed scenarios in which he said a parallel market in electronic money could begin to evolve if more controls are imposed on banks' dwindling supply of Greek euros, possibly as early as next week.

He also argues that because much of the Greek economy is about the re-export, or in tourism resale, of imported goods, without steps from Europe to ensure the supply of credit for short-term trade finance, businesses will be crippled.

"You need credit to do trade finance and which bank in their right mind is going to give Greece credit on short term trade finance?" he says. "I would suspect that very few people will be prepared to exchange the drachma for very much.

"If there is significant aid and backing for trade finance then the drachma doesn't have to depreciate very much. But in a disaster scenario where they're only really getting Red Cross parcels and the banking system has collapsed, you can declare whatever number you like."

(Editing by Mike Dolan and Louise Ireland)