Greece is not printing its own money already. No drachmas are being issued by Greece, nor is there monetisation of public debt. However….
And with that rather tantalising intro — Stephane Deo of UBS blows the lid off something we’ve been wondering about Greece for a while.
Quasi-money. Critical shortages of euros. Payments of taxes, wages, pensions etc., coming due in those euros, becoming increasingly desperate. Avenues to Notgeld?
Echoes, incidentally, of Argentina’s experiment with patacones, lecops, and other exotic instruments designed to be traded in place of pesos, before 2001’s default.
There was more evidence this week about the scale of the Greek economy’s cash crunch. VAT receipts have plunged on the year, Kathmerini reported:
Finance Ministry officials attribute the slump in VAT receipt figures to the major cash flow problems that enterprises are facing. Some of the latter are choosing not to pay for their VAT in order to plug other holes caused by liquidity problems.
That might not be the whole story. Companies have complained that the government is the one so short of cash that it’s not paying them VAT rebates in time. The IMF’s most recent report on Greece’s bailout in any case also hinted at these problems, observing that a drop in firms’ social security contributions reflected how cash is tight across the system.
And above all, there are continued postponements to the official eurozone credit that keeps the lights on in the Greek government. When this last happened in late October and early November, the state’s cash-flows had to be tightly managed. But it avoided issuing actual IOUs — T-bills, paper with a specified maturity, what have you — in place of cash, which is a relief.
But with the stakes even higher, would it be so surprising this time around?
Interestingly, Deo’s note assesses whether Greece’s infamous “pharma bonds” are already akin to this process. The bonds are zero-coupon debt issued to companies that were owed cash — €5.6bn of it — from Greek hospitals between 2007 and 2009. As the FT’s John Dizard wrote way back in July 2010, the Greek government also added a 19 per cent discount to the original size of hospital suppliers’ claims. Suppliers seem to have sold the bonds as soon as they received them, despite the heavy discounts involved.
At any rate, here’s the argument from UBS (link added):
Are pharma bonds another form of quasi-monies, like the Argentinean Patacones or the Californian IOU? Yes and no. Those two above examples shows that in both cases it was very close to money printing, if not actually money printing in bona fide. The Greek pharma bonds present a number of similarities:
– In the three cases, Argentina, California and Greece, the reason they were used is once again nominal rigidity of the budget and the inability of a government to address the deficit properly in the context of a monetary union.
– In all cases, the payment of arrears was done by printing a financial instrument.
– In all cases, the instrument was tradable and could be used as a means of payment, or at least be redeemed.
– In all cases, the quasi-money was only temporary; in the case of Argentina and Greece because the financial instrument was a bond with a fixed duration, in the case of California because the IOUs were supposed to be refunded as soon as the budget allowed.
– To that extent, we would argue that Greece was indeed approaching the grey area of quasi-monies. There is, however, one important distinction. In both the case of Argentina and California, the financial instrument were supposed to be a means of payments for private individuals and in doing so increased the money available. This is not really the case in Greece…
The mystery though is if suppliers sold the bonds to Greek banks for cash who then pledged it at the ECB. No one paid cash for the bond in the first place.
In any case — the whole discussion is a sign of how close to the brink Greece is.
Arnie’s IOUs – FT Alphaville (2009)