amorgos34
CHIAGNI & FOTTI SRL
Molto interessante, specialmente gli ultimi 2 paragrafi
J.P. Morgan Logo
16 Jun 2015
Europe Economic Research
Greece IOUs: not a viable solution
There is speculation that if Greece is forced to impose capital controls, then the government would choose to start issuing IOUs in order to pay public sector salaries, suppliers, pensions and other benefits. Indeed, some commentators view IOUs as a way of Greece achieving fiscal flexibility within the confines of the monetary union and, thus, as a way of remaining within EMU without a political deal with its creditors. We do not find this view credible.
Before examining how IOUs might work, two points are worth making.
First, the government is already issuing IOUs de facto if not de jure, due to the build-up of arrears to private sector suppliers. According to the Finance Ministry, arrears increased from €3bn at the end of last year to €3.7bn at the end of March. Most likely, they have risen significantly since then.
Second, Greece is probably some way from having to issue sizable amounts of IOUs because its primary position is not yet very deeply in deficit. In the first quarter, the overall deficit was €1bn, of which €2.2bn was interest payments. Thus, the primary position was a surplus of €1.2bn. Assuming that the government stopped paying all interest and amortization obligations, then it would only need to issue IOUs to cover its primary deficit. Although it seems likely that the primary position is back in deficit by now, with the economy back in recession, it is probably not huge. Therefore, for the near term, the pressure to issue a significant amount of IOUs would be limited.
If the Greek government did start issuing IOUs, they would likely be bearer instruments, promising to pay the holder a certain amount of euros. Alternatively, they could offer a future reduction in tax liability. They could have a fixed maturity, but more likely they would be open ended.
In our view, IOUs could only be a stop-gap measure, rather than a durable way of staying in the monetary union. They would likely trade at a deep discount to euros, for four reasons. First, IOUs are essentially a debt instrument issued by a country experiencing fiscal stress. Given that governments can default on debt obligations, there might be concern over time that the Greek government would default on the IOUs. Second, the introduction of IOUs would likely be viewed as a big step towards EMU exit. As a consequence, Greek citizens would hoard euros and would be very reluctant to give euros in exchange for IOUs. Of course, with a Greek exit, the government would not be able to redeem the IOUs in euros. Third, banks would not be able to discount IOUs for cash, because the ECB would not accept them in refinancing operations or as collateral for ELA. And fourth, no one outside Greece would accept IOUs in settlement for trade in goods and services.
Even if the Greek government tried to make IOUs something akin to legal tender—making people accept them as legal settlement in payment for goods and services, debt redemption and tax obligations—we doubt that this could be sustained at a 1:1 exchange rate with euros. A deep discount would likely apply unless the government offered to exchange IOUs for euros at a 1:1 exchange rate. But, of course, it wouldn’t have the resources to do that. If it had the resources, it wouldn’t be issuing IOUs in the first place. Moreover, trying to create a parallel legal tender would likely clash with the EU treaties.
Finally, it is not clear that the introduction of IOUs would be politically tolerable, because they would hurt the very people that the Greek government is trying to protect. If, for example, someone’s pension were paid entirely in IOUs, and these traded at a 30% discount, then that would be equivalent to a reduction in the real pension of 30%. This is far larger than the pension cut being demanded by the creditors in the current negotiations.
In our view, the introduction of IOUs does not create a mechanism for Greece to stay in the monetary union in the long term without a political agreement with the rest of the region. If we move to a situation of capital controls, as seems increasingly likely, Greece and its creditors will need to decide relatively quickly whether a deal is possible. If not, then Greece will likely choose to leave the monetary union. IOUs are unlikely to play a significant role in this process, in our view, unless Greece chooses the path of exit.
J.P. Morgan Logo
16 Jun 2015
Europe Economic Research
Greece IOUs: not a viable solution
There is speculation that if Greece is forced to impose capital controls, then the government would choose to start issuing IOUs in order to pay public sector salaries, suppliers, pensions and other benefits. Indeed, some commentators view IOUs as a way of Greece achieving fiscal flexibility within the confines of the monetary union and, thus, as a way of remaining within EMU without a political deal with its creditors. We do not find this view credible.
Before examining how IOUs might work, two points are worth making.
First, the government is already issuing IOUs de facto if not de jure, due to the build-up of arrears to private sector suppliers. According to the Finance Ministry, arrears increased from €3bn at the end of last year to €3.7bn at the end of March. Most likely, they have risen significantly since then.
Second, Greece is probably some way from having to issue sizable amounts of IOUs because its primary position is not yet very deeply in deficit. In the first quarter, the overall deficit was €1bn, of which €2.2bn was interest payments. Thus, the primary position was a surplus of €1.2bn. Assuming that the government stopped paying all interest and amortization obligations, then it would only need to issue IOUs to cover its primary deficit. Although it seems likely that the primary position is back in deficit by now, with the economy back in recession, it is probably not huge. Therefore, for the near term, the pressure to issue a significant amount of IOUs would be limited.
If the Greek government did start issuing IOUs, they would likely be bearer instruments, promising to pay the holder a certain amount of euros. Alternatively, they could offer a future reduction in tax liability. They could have a fixed maturity, but more likely they would be open ended.
In our view, IOUs could only be a stop-gap measure, rather than a durable way of staying in the monetary union. They would likely trade at a deep discount to euros, for four reasons. First, IOUs are essentially a debt instrument issued by a country experiencing fiscal stress. Given that governments can default on debt obligations, there might be concern over time that the Greek government would default on the IOUs. Second, the introduction of IOUs would likely be viewed as a big step towards EMU exit. As a consequence, Greek citizens would hoard euros and would be very reluctant to give euros in exchange for IOUs. Of course, with a Greek exit, the government would not be able to redeem the IOUs in euros. Third, banks would not be able to discount IOUs for cash, because the ECB would not accept them in refinancing operations or as collateral for ELA. And fourth, no one outside Greece would accept IOUs in settlement for trade in goods and services.
Even if the Greek government tried to make IOUs something akin to legal tender—making people accept them as legal settlement in payment for goods and services, debt redemption and tax obligations—we doubt that this could be sustained at a 1:1 exchange rate with euros. A deep discount would likely apply unless the government offered to exchange IOUs for euros at a 1:1 exchange rate. But, of course, it wouldn’t have the resources to do that. If it had the resources, it wouldn’t be issuing IOUs in the first place. Moreover, trying to create a parallel legal tender would likely clash with the EU treaties.
Finally, it is not clear that the introduction of IOUs would be politically tolerable, because they would hurt the very people that the Greek government is trying to protect. If, for example, someone’s pension were paid entirely in IOUs, and these traded at a 30% discount, then that would be equivalent to a reduction in the real pension of 30%. This is far larger than the pension cut being demanded by the creditors in the current negotiations.
In our view, the introduction of IOUs does not create a mechanism for Greece to stay in the monetary union in the long term without a political agreement with the rest of the region. If we move to a situation of capital controls, as seems increasingly likely, Greece and its creditors will need to decide relatively quickly whether a deal is possible. If not, then Greece will likely choose to leave the monetary union. IOUs are unlikely to play a significant role in this process, in our view, unless Greece chooses the path of exit.
