lunedì 20 aprile 2015

Greek parallel currency: how to do it properly

According to several recent media reports, both the Greek government and the ECB are taking into consideration the possibility (for Greece) to issue a parallel domestic currency (PDC) to pay governmental expenditures, including civil servants salaries, pensions etc. This could happen in the coming weeks as Greece faces a severe shortage of euros.
It is important to stress that the introduction of a Greek PDC could take place in at least two ways, with deeply different implications.
The first avenue would be for Greece to issue IOUs, ie promises to pay to the bearer euros upon a future time expiration. Basically they would be euro denominated debt obligation, issued to pay salaries, pensions etc. in IOUs instead of in euro.
The second avenue would be to issue Tax Credit Certificates (TCC) which entitles the bearer to settle future tax obligations, and to use them to supplement payments and to implement new demand support actions. The Greek government could, for instance:
increase net monthly salaries by paying eg 1.000 euros plus 100 TCC instead of just 1.000 euros;
reduce actual gross labor costs by giving eg 200 TCC to each domestic employer which pays a salary (gross of taxes and social costs) of 2.000 euros;
partially fund humanitarian actions, job guarantee programs etc.
The first avenue is likely to trigger the effect envisaged by Costas Lapavitsas, Jacques Sapir, Frances Coppola and many others. In Lapavitsas words: “This is not a sustainable arrangement. It’s only a stopgap measure. And, at the end of the line, it’s a stopgap towards the exit, basically. It needs to be understood as such. So yes, I’m in favor of it… But be under no illusion that this could be a permanent, stable solution”.
The reason why the IOU avenue is not a permanent one is twofold: (i) the Greek government would be issuing additional euro-denominated debt obligations without any hint on how it will be able to reimburse them, and (ii) replacing euro payments for salaries and pensions with IOU disbursements would clearly indicate to the general public that Greece cannot stay in the Eurozone.
The second avenue, the TCC one, is based on a very different idea: Greece aims at attaining a proper balance between euro governmental payments and euro governmental receipts. In addition, to expand demand and trigger a strong economic recovery, it introduces a supporting tool. As long as the total amount of circulating TCC is not too large as a percentage of GDP and of gross governmental receipts, TCC will be valuable, will be accepted by the general public and will trade at not too high a discount vis-à-vis the euro.
So what has to be done is going along the TCC avenue, clearly stating that it aims at allowing Greece to stay in the Eurozone, while implementing demand support actions to increase citizens’ purchasing power, to reduce domestic labor costs, and to strongly increase GDP. This would also generate, in due course, higher gross tax receipts (which will offset TCC being used to settle future taxes).
If, as appears to be the case, Greece has problems in repaying short-term debt installments to the ECB, to the IMF and to Eurozone partners, it should unilaterally announce (i) the implementation of the TCC program (ii) a commitment to generate a euro primary surplus (euro receipts less euro payments, TCC disbursements not included) say of 1% of GDP in 2015 and 3% starting from 2016, and (iii) a proposal for a new repayment schedule, which would presumably include spreading 2015 debt repayments over eg the 2016-2018 timeframe. 
The ECB and the EU could react negatively to such an announcement, taking actions such as the suspension of the Emergency Liquidity Assistance to the Greek banking sector, which would precipitate the Grexit. On the other hand, this would precisely cause the outcome that everybody wants to avoid. It would be unwise and, in my opinion, it is unlikely to happen.

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