Earlier today we said the following about the Greek government’s rapidly deteriorating cash situation:
So it’s either pay salaries and pensions or pay the IMF which is tragically ironic because Athens has already gone the route of plundering pensions to make payments to its creditors, the only difference is that now, instead of “borrowing” money from the public coffers and hoping to pay it back in the interim before anyone actually gets shorted, you’re talking about simply not paying people at all (or paying people with IOUs which would be the hilarious rough equivalent of conducting repos with individual citizens) which needless to say could turn into an untenable social and political issue virtually overnight, not to mention the fact that if the government defaults you would almost certainly see the imposition of capital controls in order to stem the inevitable deposit flight. Athens owes nearly €2 billion in public sector wages and pensions at the end of the month.
For anyone who thought we were joking when we suggested Athens may look to pay government employees with IOUs, we were not, nor were we kidding when we said such a move by the Greek government would almost immediately plunge the country into a state of extreme instability which would likely be characterized by mass protests, bank runs, and then capital controls to stop the bank runs. While we certainly hope, for the sake of the poor Greek populace, that this eventuality does not play out, here’s Capital Economics to explain what an IOU scenario would entail:
The Greek crisis has reached a new crunch point amid signs that the Eurogroup will not grant desperately needed financial aid after next week’s meeting. 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.
And that’s exactly what would happen. Greeks have labored under the threat of economic collapse for years and surely being paid with an IOU issued by a government who just turned over your paycheck to the IMF which is set to disburse $2.4 billion in aid to Ukraine at just about the exact same time Greece would officially go into default (remember there’s a 30-day lag, Greece will likely fall short in early May, and the second tranche of aid is set to be delivered to Ukraine in June) would be the final insult and we imagine that all of those public sector workers who refuse to work would use their time off to express, in one way or another, their extreme displeasure at their socialist ‘savior’ Syriza.
Here’s more from Capital Economics:
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.
It’s worth taking a moment to reflect on that absurd chain of events. By paying citizens in IOUs, Athens would be virtually ensuring that it would remain insolvent because even as the Greek government isn’t the most efficient tax collector in the world, some taxes are better than no taxes, and the latter is what you would have if Greeks began to hand in their IOUs in place of euro-denominated tax payments and we suspect that Capital Economics is correct when they say that the IMF would not be amenable to accepting sticky notes from Varoufakis that say “a little short right now, will pay you when able” especially given the fact that Greece is already issuing the rough equivalent of those in the form of Greek T-bills which are sitting on the books of the very same Greek banks which, in the event the IOU solution is pursued, will be besieged by the very same citizens to whom the IOUs are issued.
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Or, put more simply: