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Currency News

Greek lessons from Baghdad

Earlier this year Financial News investigated a series of historical currency union break-ups, asking whether they could offer guidance for policymakers required to plan for a potential fracturing of the eurozone.

However, if the worst happens and European states have to resurrect their drachmas, pesos and escudos in 2012, there is one lesson from more recent history about how to get a new currency up and running in even the most difficult circumstances.

The relatively successful introduction of a new dinar into post-war Iraq, undertaken in the context of a vicious sectarian conflict, should offer encouragement to even the most fearful finance ministry official pondering the new year this week in eurozone capitals.

Immediately after the US invasion in 2003, dollars were the de facto currency in Iraq.

However, the coalition provisional authority, or CPA, decided that a permanent dollarization of the economy was impractical.

Aside from the infelicitous political implications, it would have meant that prices and wages would have had to bear the brunt of any future changes in the oil price, with the currency unable to fall and rise in response to the changing value of the country's main foreign exchange earner.

In June, with Iraq's cash-based economy in desperate need of liquidity, the CPA reluctantly ordered the Iraqi central bank to start re-printing 'Saddam' dinars – complete with the dictator’s face on them – as an interim measure.

A few weeks later, the US viceroy in Iraq, Paul Bremer, announced he would introduce a brand new currency, commissioning De La Rue, the British banknote printer, to create and deliver the new dinars.

The same company is now fielding questions about whether it is ready to print new currencies for countries at risk from toppling out of the eurozone. Tim Cobbold, the firm’s chief executive, told Reuters in November that he thought the situation could create opportunities - but refused to elaborate further.

In a situation where speed is vital, the company’s record in Iraq is, at least, promising for any Greek officials making emergency plans should the worst happen.

Despite the violent instability afflicting Iraq in 2003, De La Rue was able to print and distribute the new notes to the country’s banks in only three months.

The design was based on the old, strong, so-called 'Swiss' dinars which had been Iraq's currency prior to 1991 - but which still circulated in the north of the country.

In August 2003, Iraqis were told to deposit their currency in banks to facilitate the coming exchange, which would start on October 15, with a deadline for old dinars to be handed in set for December 15.

Despite the difficulties posed in a society which was drifting into sectarian violence, the currency exchange was carried out quickly and efficiently.

Since then, speculators have rushed into the new currency, gambling that it would appreciate as more oil production came on stream – perhaps not a prospect that Greece should ponder, unless the Aegean has more to offer than package holidays.

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