International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CHAPTER 3

Yesterday and Yesteryear

A Brief History of the International Monetary System

The time has come,

The Walrus said,

To talk of all this ken:

Of pounds, and euros and dollar bills

Of renmimbi and yen,

And how the winds have told me,

Let's all float, amen.

Robert L. Bartley

I want the whole of Europe to have one currency: it will make trading a lot easier.

Napoleon I

On May 2, 2010, the euro-zone governments and the International Monetary Fund (IMF) announced a €110 billion rescue plan for beleaguered Greece. The country was mired in sluggish growth, a budget deficit at 13 percent of gross domestic product (GDP), and public debt-to-GDP ratio approaching 150 percent. The Greek government was forced to commit to drastic budget reductions in order to avoid bankruptcy. Would and could the Greek government impose so much pain on its citizens in order to remain in the euro-zone and keep the European Monetary Union intact? Would the austerity package only makes matters worse and condemn Greece to endless recession? Theoretically, devaluation is not an option since Greece has been an integral part of the European Monetary Union since 2002! Or should Greece simply exit the euro and resurrect a devalued drachma in order to revive economic growth—ultimately perhaps the only (but painful) remedy to balance its budget by stimulating revenues? Crises such as the 2010 Greek near default are rooted in a long history of trial and error as countries attempt to adopt the optimal exchange ...