As we first reported yesterday, one of the proposed measures to be implemented in Greece just before, or during its default and/or exit from the Eurozone, in addition to pervasive capital controls of course, is the implementation of a parallel “currency”, yesterday, a government paying its citizens with IOUs.
This is what we said yesterday:
Greece might resort to IOUs and/or capital controls to avoid a disorderly default and keep the banks afloat for now. But such measures would offer a temporary solution at best and could be the first steps towards a euro-zone exit.
Assuming that a deal is not reached next week, there are a couple of routes that the Greek Government might take to avert disaster in the short term. First, it could issue IOUs to pay public sector workers and pensioners and free up money to repay its debts. But this could cause economic chaos if fears that the IOUs would never be paid sparked riots or public sector employees simply refused to work.
Even if Greek people accepted IOUs, they could only function for a very short period. Before long, those receiving incomes in IOUs could only afford to pay their taxes through the same medium. And given that the Government’s international creditors would not accept IOUs as repayment, this would still lead to a debt default. Effectively, the IOUs would become a parallel currency whose value was deemed lower than that of a normal euro. This would be akin to a euro-zone exit.
Today, to our dismay, we find that the ECB has not only considered a “parallel currency” alternative but for Greece this may be a reality before long. According to Reuters, the ECB “has analyzed a scenario in which Greece runs out of money and starts paying civil servants with IOUs, creating a virtual second currency within the euro bloc, people with knowledge of the exercise told Reuters.”
“The fact is we are not seeing any progress… So we have to look at these scenarios,” said one person with knowledge of the matter.
A spokesman for the ECB said it “does not engage in speculation about how specific scenarios regarding Greece could unfold.”
One Greek government official, who declined to be named, said there was no need to examine such a scenario because Athens was optimistic it would reach a deal with its international lenders by the end of the month.
Not surprisingly, “experts at the ECB have concluded that using IOUs to pay public sector wages would probably fail to avert a full-blown crisis and could even threaten Greece’s future in the 19-country euro zone.”
