On Tuesday, Latvia’s central bank chief Ilmars Rimsevics called [10] the introduction of a new currency in Greece the “most realistic scenario.”
The country is in its second week of capital controls and banks remain shut in the wake of a referendum which saw some 61% of Greeks vote against the terms of the latest bailout deal proposed by the troika.
Now, Germany has indicated [11] that any new proposal will come with harsher terms to reflect the recent deterioration in the Greek economy. Furthermore, Berlin’s stance on debt writedowns for Greece (which the IMF deems necessary if Athens is to return to fiscal sustainability) has hardened, meaning it will now be exceptionally difficult for Tsipras to fulfill the implicit promise he made to his people when he campaigned for a referendum “no” vote.
Given all of this, it now appears increasingly likely that Greece will be forced to return to the drachma or will at least be compelled to issue some manner of scrip in the face of an acute cash shortage and a worsening credit crunch which together threaten to leave government employees in the lurch and cut off the flow of imported goods.
Sure enough, Kathimerini says the Greek government is indeed preparing for the launch [12] of an “alternative currency.” Here’s more (Google translated):
In full preparedness is the government the possibility to require the use of a parallel currency euro.
According to reports, the Ministry of Finance of the parallel currency design process has begun and left deliberations these days with lenders about whether it will require the implementation of that measure. By today's standards, government funds fail to service the obligation to pay wages and pensions at the end of the month.
According to reports, the first half of the salaries of civil servants (about 300 mil. Euros) is no way to cover euro. In this regard, the Deputy Finance Minister D. Mardas assured that payment of a fortnight is secured. However, today nobody can assure that it is also guaranteed the payment by the State of about 2 billion. euros at the end of the month for salaries, pensions and subsidies to social security funds.
Apart from the apparent lack of liquidity on wages, the state can not serve longer and pensions.Every month, for the payment of 4,551,074 pensions (information system data "Sun" for May) required 2.3 billion. Euros, of which at least 850 million. Euro is direct government funding. Under these difficulties, many are those who have suggested for months the possibility of a parallel currency use.
This comes on the heels of a story run by The Telegraph which suggested [13] that the resignation of Yanis Varoufakis was directly related to comments the former FinMin made regarding the government’s preparations for the introduction of a parallel currency.
Not surprisingly, the Greek finance ministry has categorically denied the Kathimerini story calling it “completely unsubstantiated.”
Ironically, the notion of a Greek redenomination may indeed be “unsubstantiated” — just not in the sense suggested by the finance ministry. To let Credit Suisse tell it, a return to a “shiny new devaluation mechanism” is simply a “pipe dream.” As a reminder, here is the bank's take:
We again want to be clear: “leaving EMU” is not a policy choice and, if enforced by referendum, materially reduces Greece’s freedom of action. Introducing a new currency is a pipe dream and the likely result is a broken financial system reliant on a neighbor’s currency (the euro) and banking system..
This is the nature of “Grexit”; it is not a choice to circulate a shiny new devaluation mechanism, it is a decision to reject the (local, to begin with) financial system and start again.
We have always pointed out that the new “currency” mismatches involved in any attempt to exit the euro would be so "toxic" for the banking system as to make it not a practical alternative.
And here's Reuters with more [14] on the 'California' option:
Yannis Varoufakis, who quit on Monday as Greece's finance minister, [suggested] that Athens might issue IOUs like the state of California did during a budget impasse in 2009, could amount to the same thing.
Facing a massive budget shortfall, California's then governor Arnold Schwarzenegger issued more than 300,000 IOUs, known as warrants, with a value of almost $2 billion, to pay taxpayer refunds and others due money from the state.
After a few months, the state struck a new budget deal and started to redeem the notes. But unlike California, Greece cannot fix its financial problems simply by passing a new budget; if it issues IOUs, it could probably redeem them only if it receives a future international bailout. Otherwise, the warrants could turn into a permanent parallel currency.
"There was never any possibility that California would leave the dollar. It was more a way to replace bonds and financing on the market than to replace a currency," said Gregory Claeys of Brussels' Bruegel think-tank.
"In Greece, it's a different issue. Once they produced these IOUs there would be no turning back. It would de facto end up in Grexit."
Although the Greek government appears not to have planned for a parallel currency, officials both in Brussels, home to the European Union's executive, and Frankfurt, headquarters of the European Central Bank, believe that it could happen.
In case all of the above isn't clear enough, we'll leave you with the following bullet points (once again from Credit Suisse) which paint a rather grim(bo [15]) picture of the redenomination endgame:
- Countries don’t leave the euro.
- If countries try to leave, or show signs that they might, the euro leaves them first.
- To avoid getting trapped, devalued or defaulted.
- A liquidity crisis occurs and domestic liabilities are replaced by foreign ones that cannot be redenominated. So on exit a solvency crisis appears certain.
- As “the euro leaves”, it takes the country’s banking system, and country’s credit, with it.
- So a Greek “failure” would mean sovereign and banking sector default more than it would mean a new currency, we think.
- If it decides to default systemically, the Greek state could pass a law (illegal under the EU Treaties) converting domestic assets and liabilities to new drachma (GRN).
- This would presumably make the Bank of Greece insolvent (GRN assets and foreign EUR liabilities).
- So at the national level there would be a default on the intra-Eurosystem liabilities as well as government debt.
- It would be challenging to settle money electronically, but the effect would be to convert the balance sheet of Greek banks into a new unconvertible currency which would trade, if at all, at a discount to the euro.
- The government would have large unresolved euro debts. How it could re-establish its credit, and so recapitalise the banking system without foreign assistance, is unclear.
- The core expectation would be a “broken” banking system paying out on deposit guarantees through the GRN.
