A summary of its recent article:
Central government could settle its domestic bills with pensioners and civil servants in IOUs, while using the euros collected via the tax system to pay back the IMF and other creditors, including the ECB. The IOUs become a de facto parallel currency and can be traded ‘on the street’ (ie with local businesses). The government may also decide to accept them as tax payment, a move which could increase their value.
IOUs have been issued in the past in Greece and elsewhere. Shortly after the Greek debt crisis erupted, Athens began paying some of its suppliers using IOUs. In 2009, the government in California, during a fiscal crisis, printed $3bn of IOUs for businesses, individual taxpayers and local counties in lieu of cash. It sent more than $450m of them to court-appointed attorneys, county-run health schemes and taxpayers awaiting rebates, among others. They continued to be issued until Arnold Schwarzenegger, California governor and the state legislature agreed a deal to close the $26bn budget deficit. Despite the opposition of large banks this measure was proposed again in 2010 see Bloomberg.
However, the FT ends, there are problems with the use of these documents:
- the legality of a new currency would be questioned under EU law, which states that the euro should be the sole legal tender in eurozone member states;
- the eurozone authorities would see these measures as a deviation from the stringent fiscal rules to which governments, including Athens, have agreed;
- by issuing IOUs, the Greek government would probably be spending in excess of budget deficit limits and
- tax credit certificates risk blowing a hole in future budgets, if the recovery they are supposed to prompt fails to materialise.
Some economists doubt the long-term sustainability of a country-wide parallel currency system because when there are two currencies in circulation and one has more value than the other, consumers would prefer to store the more valuable banknotes – euros in this case – and use the paper which is worth less – the IOUs – for day-to-day transactions.
The FT article by Ferdinando Giugliano, Economics Correspondent may be read here: http://www.ft.com/cms/s/0/5033fc1c-104e-11e5-b4dc-00144feabdc0.html#axzz3dD4JzM2M