Economists say it’s a catastrophe if Greece leaves the eurozone – but there are precedents which did not lead to financial armageddon. Are there any lessons from history? Channel 4 News investigates.
Helicopters on standby, stamps pre-printed in Latin America and shipped in secret, and a behind-closed-doors operation involving 40,000 people.
It sounds like the plot of a spy film, but it is not. Instead, it is how the Czech Republic and Slovakia handled the split of their currency back in 1993.
It is a historic event, but as economists continue to take bets on whether Greece will exit the euro, it is one which many believe could hold some lessons for today’s policymakers.
Indeed, the man who handled the split in the 1990s, Pavel Kysilka, has already had phone-calls from the International Monetary Fund in Washington to check what he is doing these days.
Jonathan Tepper, economist and founder of the research group Variant Perception, recently described the parallels with the Czechoslovakian currency split as uncanny, and very instructive in his paper on the euro breakup.
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.
Pavel Kysilka (pictured below), now chief executive of the Czech savings bank Ceská sporitelna, was in charge of proceedings on the Czech side of the break up. He said speed and secrecy were both key, to prevent public panic.
“The split took place under an urgent time-scenario,” he told Channel 4 News.
The Czech Republic and Slovakia became separate countries on 1 January 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 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 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.
On 2 February, 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 8 February. To save time, old Czechoslovak notes were stamped with either Czech or Slovak identification to mark them as the separate currencies.
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. Pavel Kysilka
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,” recalled 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, he said.
“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 explained.
Read more: How would Greece create a new currency?
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 black-out of internet banking websites to prevent last-minute transfers. Back in the 1990s, later in the year, both countries printed their new currencies to replace the stamped notes.
“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,” said Kysilka.
Later that year, 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.
So are there lessons there for Greece? Many think so.
Jan Fidrmuc, a European academic, wrote the most comprehensive economic study of the breakup at the end of the 1990s with his co-author Július Horváth.
“The main lesson is, once they decide to do it, it can be done relatively quickly and the cost is not huge,” he said.
“So it will make things tougher for Greece and the eurozone in the short-term, but unless there’s contagion, bank runs and unstable developments further on, it doesn’t have to lead to a great depression worldwide.”
He believes that there could even be positives if the process is handled properly.
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. Pavel Kysilka
“It is not necessarily cheap to print new currency but that doesn’t have to happen straight away. Once they have determined a way to make the Greek currency temporarily distinguishable from the rest of the currency in circulation, they have several months to print a new currency. It will be costly, but it is not going to ruin Greece,” he said.
Others agree. In fact, Variant Perception’s Tepper believes that there is a lot to learn from the Czechoslovakian split. He has said that a euro exit for Greece and other countries could be “the most powerful policy tool to re-balance Europe and create growth”, followed by managed devaluations and defaults.
Kysilka – the man who oversaw the Czech split – believes a Greek exit is the only solution. However, he admitted that the process facing them will be even more complicated than the mammoth task which faced him and his team in 1993.
“The similarity is huge, but the situation in Greece is a hundred times worse than it used to be in Slovakia,” he said.
Jennifer Rigby is a journalist based in the Czech Republic. Klára Jiricná contributed to this report.