The Corner

And Now Quasi-Drachmas?

Here, perhaps, is another warning sign of monetary breakdown in Greece.

Business Insider reports:

In a note from this week, UBS economist Stephane Deo asks: Is Greece (already) printing its own money?

Deo centers on two areas: The first is the expanding balance sheet of the Greek central bank via the ELA (Emergency Liquidity Assistance) a scheme by which the national central banks help in keeping the domestic banking industry solvent. The other focus area is a little more intriguing and arcane. He asks specifically: Are quasi-drachmas being issued?

Quasi-drachmas? Well what he’s referring to is a scheme whereby the state has paid hospital suppliers in the form of domestically issued bonds:

“The Greek state hospitals accumulated arrears to suppliers during the period from 2005 to 2010. In May-June 2010, the Greek government decided to put an end to this practice and decided to take up this outstanding debt (law 3867/2010). In the following months, all the accumulated debt of public hospitals and the healthcare system from 2005 to mid 2007 was settled on a cash basis. The amount was EUR1.5bn for the years 2005 and 2006, with an additional EUR240 million for the first half of 2007. A total of EUR5.6bn accumulated between 2007 and 2010, was settled with zero coupon bonds. This was the creation of the “Pharma-Bonds”.  

These financial instruments are bonds, and have all the characteristics of Hellenic Republic Bonds: they bear international securities identification numbers (ISINs); they are negotiable on the Athens Exchange and they rank pari passu with other Greek debt. The government, in one of its press releases, notes that “bondholders who choose to discount these bonds at the banks will crystallise a 19% discount versus their original claim.”

We would argue, however, that they are more than just another bond issued by the Greek government. To be specific, they seem to us very akin to what economists call quasi-monies. These quasi-monies have appeared in a number of cases, usually put in place by government to find an escape valve out of nominal fiscal rigidities in the face of a financing issue. This especially happens in a case of a government of a monetary union that cannot print money to fund its deficit. “

Deo goes onto compare these “Pharma-Bonds” to the famous IOUs issued in California in 2009, when the state no longer had the cash to pay some employees and vendors. Argentina did something similar during its famous debt crisis — creating quasi money vehicles when it could no longer literally create money.

And in the case of Greece, the pharma-bonds seem unusually money-like, in that they can be deposited with a bank, which can them pledge them as collateral for real cash.

These do indeed look a bit like the quasi-monies that surfaced in Argentina as the dollar/peso peg crumbled in 2001. I briefly described these strange creations a few months back here:

The banks—and, of course, the country itself—were quite literally running out of the dollars that made up a monetary base already depleted by previous capital flight, and a growing current account deficit. The rules of a currency board (even in its looser Argentine variant) meant that it was not possible simply to print money to fill the gap. This is a problem familiar to those of today’s PIIGS who have to watch the money drain out of their economies, yet are blocked from direct access to the printing press by the European Central Bank. Argentina’s more sinuous treasuries (provincial and then national) tried to meet this challenge by issuing a series of evocatively named quasi-monies (IOUs, basically), but these patacones, porteños, quebrachos, and lecops were harbingers of doom, not a solution.

But they were at least good enough for McDonalds, as this report from 2001 shows:

The Buenos Aires outlet of burger behemoth McDonald’s is preparing to accept one-year bonds in payment for food, as a cash crisis grips the Argentine economy tighter with the continued lack of conclusion to talks between the country and the International Monetary Fund (IMF).  The bonds, nicknamed patacones after a currency that became defunct 120 years ago, will be issued as part-payment of wages for the 150,000 state workers in Buenos Aires who earn more than US$740 a month…McDonald’s has launched a special new meal deal called the “Patacombo”, consisting of two cheeseburgers, French fries and a drink.

Over to you, Chancellor Merkel.

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