Greece’s ‘OXI’ Paradox and Parallel Currencies

July 6, 2015 0 Comments

Although I initially wanted the nation to reject the Syriza party, I can’t say that I’m too surprised at the results.

What does this mean?

Obviously they have rejected the budget, financial and structural economic reforms the EU have been negotiating for months. It means Finance Minister Yanis Varoufakis and Prime Minister Alex Tspiras still have their jobs, and their mandate is still legitimate (for the time being).

On the other hand, it would hardly mean that the Troika would be rushing back to the negotiating table. The vote essentially means Greece cannot accept the EU deal, not even the smallest of adjustments. Although, I’m not sure what ‘Greece’ wants (and by Greece, I really be Alex Tspiras). He says that a vote for no isn’t a vote for a Grexit. He also says that a vote for no isn’t a vote to fight against Europe.

Where the government plans to go from here is really unclear. However, the Troika is unwilling to budge on a single item-line proposal, and they have started to consider the adoption of an IOU currency, parallel currency, complementary currency or whatever you want to call it.

Parallel currencies are simply a type of alternative currency. The idea of an alternative currency, in practice, are very common today, but the idea doesn’t resonate well in the minds of most people. For example, Bitcoin is a type of alternative currency.

In most places (at least, in the United States) it is illegal to create your own money, as well as establish a ‘competing currency.’ However, bit coin gets a pass the Feds don’t consider bitcoin to be ‘tender,’ or rather notes and coins that look like they’ve been issued by the U.S. government, or any other government. Instead, its virtual currency. You can use Federal Reserve notes for majority of purchases in the U.S., and for other transactions you can use bitcoin.

IOUs (Parallel Currencies) have been used during times of economic stress, and that is certainly what Greece is going through. The ECB has cut of Emergency Liquidity Assistance and banks are running very low on cash to facilitate daily transactions. They have also forbid Greece from being able to rollover Greek denominated Tbills. This is bad considering the nation is running a budget deficit, and are unable to earn, borrow or make their own money.

A parallel currency could be beneficial in elevating financial stress. The problem is that it might not be the best thing for Greece. The IOUs would require that people accept the newly created currency. This would mean that people would have trust that the currency can retain its value.

It would also be difficult to guarantee an exchange rate of one-for-one with the new currency. If the currency doesn’t hit its growth target, it could pose as a significant liability for banks. It would be difficult for central banks to fill the gap without issuing a peg or printing more of it. This would further devalue the new currency, which might be create for exports, but terrible for purchasing power.

The alternative currency may be the best tool Greece has to use in the case of a Grexit, which isn’t saying much. Leaving the EU removes their access to Euros, which means IOUs become the official median of exchange, unless Greece decides to bring back the Drachma as well. It may give people a strong incentive to trade with it, but it doesn’t change the fact that both currencies will greatly lose their value, due to Greece defaulting on their obligations.

The whole entire thing could backfire right out of the gate, as seen when Argentina decided to adopt IOUs after their default. If they fail to be seen as a credible medium of exchange, they would essentially disappear, as people stop using them. Not to mention, creditors willing to accept IOUs would need to keep faith in the Government.

Everyone has been saying that a vote for no would essentially mean a Grexit. Today, they might be saying something else. JP Morgan said that Greece leaving the EU would be a ‘base case scenario.’ Although, it’s been less than 12 hours. Anything can happen within the next couple of weeks.

July 20th is a date everyone covering the Greek Crisis should have on their calendar. This is the date Greece has to repay the €3.3 billion to the European Central Bank.

Although, without liquidity Greece is going to have a difficult time repaying creditors from earlier due dates. I’m not sure the ECB will be willing to accept IOUs as payment, but I’m sure they’re willing to be flexible. However, if the ECB doesn’t accept these alternative forms of currency, it just might prompt a Grexit like everyone originally predicted.

One thing is perfectly clear: Greece doesn’t leave the Eurozone and becomes a replica of the market-friendly Switzerland. They’re going to leave the Euro and basically become another Argentina.

Update: Moments after writing this, I discovered that Greek Finance Minister Yanis Varoufakis has decided to resign from his position anyway. No doubt the left leaning party Syriza will miss him in these meetings and negotiations with creditors. It could be argued that Varoufakis is probably responsible for much of the brinksmanship in the deals and was no longer seen as an acceptable negotiating partner.

This is probably the reason why many in the Eurogroup have been pushing for his ‘absence,’ as he put it.

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