The rumour making the rounds today is that these two paragraphs in a recent Ambrose Evans-Pritchard piece in the Telegraph are what were the final straw for Syriza that cost Yanis Varoufakis his job.
I don’t know whether there is any basis to these rumours. However, I do know that Syriza want Greece to remain in the eurozone and that recent decisions by the ECB make it difficult for Greece. So the questions of government IOUs have to asked.
We have written about IOUs in the past, most recently regarding Greece in February. See Rob Parenteau’s Tax Anticipation Notes: A Timely Alternative Financing Instrument for Greece. The idea behind IOUs is that they give a government fiscal space i.e. the ability to maintain payments to vendors and people who require government money even if the government is having a liquidity crisis. The Greek government is clearly having a liquidity crisis right now due to its inability to ‘get euros’. And IOUs would allow the Greek government to maintain payments without needing to get more euros.
Let me run a quick and dirty sketch of a solution here for you. Here’s my idea, based in part on Rob’s Tax Anticipation Notes idea. (I am not going to go into great detail here because I have not had enough time to get into weeds on this issue where implementation would be important.) Greece would make payments to pensioners in part via tax anticipation notes that are not legal tender in Greece but are purely valuable because they can be used to expunge a tax liability at par. So, if a pensioner receives a gross pension of 500 euros, she would continue to receive, say 70% of that amount as euros, net of taxes. The other 30% she would receive as electronic tax anticipation notes (TANs) without tax deducted. The tax would be due quarterly afterwards and payable only with TANs.
One could create these notes for any vendor or for any person or business that is owed euro payment from the government, with the goal being conserving euros that the government needs. The reason I used the pension payment is to create a near-term tax liability that would give these notes value, meaning that every pensioner gets ‘value’ from a TAN payment but also has a tax liability that she must expunge with TANs.
In order to facilitate the viability of TANs as a valuable instrument, the Greek government would have to make these notes tradable without making them legal tender. Greece wants to remain in the eurozone and so the euro would remain the only legal tender in Greece for retail transactions and within the banking system. But TANs would be usable by any person or any company for expunging a tax liability. Now let’s remember that the Greek government has seen a surge in tax revenue due to rumours about bail-in haircuts for bank deposits. Their fiscal situation is better than anticipated because Greek people keen to avoid haircuts from their banks and unable to withdraw cash have drained as much of their money for taxes that they would have paid at some point anyway. So it’s clear that there is a desire in Greece’s economy to pay taxes that can be met via TANs, which can be exchanged for cash – something people want.
The Greek government would make TANs fully transferable by allowing the pensioner to call in, go to the government office or go online and transfer ownership of their TANs to someone else. The purpose is to set up a register system that is as costless as possible to facilitate transactions in TANs, something that gives them value.
The first question regarding this scheme is implementation. A register of this sort is easily maintained with bitcoin’s Blockchain-style registry, something that should prevent fraud and that makes transactions irreversible. But who is going to set the system up? I very much doubt the technical expertise exists within the Syriza government. Moreover, time is of the essence. This system needs to be in place as soon as possible.
The second question is about value. Because some pension tax liabilities have to discharged using TANs, someone is going to have to use them. Certainly, if the TANs are exchangeable for euros and valued at par to expunge tax liabilities, I would have an arbitrage opportunity if the TANs trade at a discount in the open market. If I could get 100 euros worth TANs for, say, 95 euros and instantly expunge a tax liability I had with the Greek government that I was going to pay anyway, then I am better off using a TAN than using euros through the banking system. I believe this makes TANs very likely to trade close to par if they trade at a discount at all. Since TANs have limited use and have a limited transfer system, they will be more cumbersome than the existing payments system and trade at a discount that basically values the liquidity offered by euros. If the banking system is under capital controls becase of a siege economy, that liquidity premium for euros would be reduced.
It sounds like someone in Greece is thinking about IOUs and parallel currencies. And I have maintained since February that they should do so. If the Greeks were to implement this scheme, it would increase their ability to get enough euros to maintain fiscal space. Without the ability to have this secondary payments system, Greece would have to default on its obligations to its own people and to businesses which are owed money. And if this did occur it would mean food and medicine shortages, a true humanitarian crisis. I believe Greece has days – not weeks – left to make a deal with the Institutions formerly known as the Troika. If we don’t see a deal, things are going to get much worse for the Greek economy and that’s where these IOUs come into play.