Another week of meetings has gone by, but no solution is in sight for the Greek crisis. Creditors’ willingness to refinance the Greek debt is subject to Greece’s acceptance of new austerity measures (amongst which, pension cuts and additional tax hikes). Yet this would further worsen the depression that has plagued the economy for the last six years, and would make it impossible for the country to honor its future debt obligations.
The deadlock is about principles. The EU refuses to admit that its policies to fight the crisis have been unsuccessful and unsustainable, and reasonable proposals – even as moderate as those from Syriza – have thus continued to fall on deaf ears.
As a result, very soon, short of cash, the Greek government might default on its debt. To prevent this from happening, Athens could be bound to resort to the introduction of some kind of new domestic currency, likely in the form of IOUs (promissory notes to be reimbursed at some future dates), which would circulate in parallel to the euro. The IOUs would be used by the government to pay salaries and pensions to public employees, thus freeing up the euros needed to service the external debt. European institutions and leaders have not denied this possibility.
We fear that the IOUs would do nothing to prevent Greece from defaulting chaotically and to help its economy out of depression. If Greece started using IOUs as substitute for euros, this would likely be perceived as a signal that Greece is unable to stay within the Eurosystem. Bank deposit runs would accelerate, and the exit of Greece from the euro would follow suit. In any case, the commitment to reimburse the IOUs in euro would have no credibility, since Greece is already de facto insolvent.
In our view, the most sensible action that the Greek government could take at this stage should be to introduce an instrument that would mobilize euros for domestic private sector spending purposes, rather than replacing euros. The difference is subtle and often escapes the attention of experts and commentators.
The Greek public sector, today, runs a net positive primary balance position. This means that it receives more euros as it spends, net of interest payments. If payments to creditors were to stop, Greece would have enough euros to support its public expenditures: it would not need to introduce a monetary instrument to replace short euros.
What Greece is actually missing is the resources to re-launch the economy. To this end, it should issue a new type of non-debt bonds, which we have recently proposed in books and posts under the name of Tax Credit Certificates (TCCs). A tax credit certificate would entitle its bearer to a tax discount of an equivalent amount maturing in, say, two years after issuance. Such future entitlement could be liquidated in exchange for euros and be used for immediate spending purposes. Liquidation of TCCs would take place against purchases of TCCs by those who want to acquire the right to future tax discounts. For investors, the TCCs would be a safe investment instrument paying an interest comparable to a two-year zero-coupon bond. Besides, not being a debt instrument, TCCs would be safer than conventional bonds: they would not imply a government commitment to future repayments, and would therefore make it impossible for the issuing government to default on them.
Through liquidation, TCCs allow future tax discounts to be transformed into current spending. Under most conservative estimates, the output recovery that would follow during the TCC deferral time (that is, until the certificate matures) would generate enough fiscal revenues to compensate for the euro shortfalls that the government would incur by receiving maturing TCCs for tax discounts.
The Greek government could issue, say, 7 billion euros equivalent of TCCs (about 4% of national GDP), which it would assign to a variety of uses: allocations to enterprises in relation to their labor cost (so as to immediately improve their competitiveness), workers’ salary support, and social transfers to needing households. Receivers of TCCs could exchange them for euros in the financial market at discount on their nominal value. The discount would be small, since total TCC issuances would not be large relative to total fiscal revenues (7 billions would only represent about 10% of total gross revenues). TCC assignments would supplement disposable incomes, thus adding new spending power to income earners and stimulating demand; they would make Greek exports competitive, and make investment in Greece attractive.
At the same time, Greece should suspend payments to international creditors while it would announce a new financial plan whereby it would commit to allocating, say, 2% of GDP to external debt payments (in euro) starting in 2016. The commitment would be credible once taken in the context of a pro-growth economic program driven by the TCC stimulus. Safeguard clauses could be introduced in the new financial plan, which would be activated in the event of fiscal under performance vis-à-vis the 2% reimbursement commitment. For instance, the government could entitle taxpayers to receive additional TCCs bearing longer maturities as compensation for additional euro tax payments, or TCC holders could be incentivized to postpone the use of TCCs for tax discounts by receiving an increase in their face value. Such safeguards would be much less pro-cyclical than those that would be imposed by the EU to secure budget targets in the event of fiscal under-performance.
A “euro + TCC” system would posses all technical requirements to make it stable and sustainable. The unit of account and legal tender of Greece would remain the euro. Yet Greece would gain the necessary means to jump-start the economy. In addition, the prospects for creditors would improve enormously.
The political reaction of the Europe is obviously a different matter. The EU and ECB might not appreciate an innovation like the TCCs. They might oppose it and even take punitive action against Greece, such as cutting it off the Emergency Liquidity Facility. Thus would force Greece into default and precipitate its exit from the euro. But this is also what Europe doesn’t want: a similar reaction would betray its ideological furor, and risk triggering the crumbling of the Eurosystem.
We think this a very unlikely scenario. In any case, should it happen, the responsibility of the resulting disorderly breakup would rest entirely on the shoulders of the EU authorities.