Greece could use 'parallel currency' as desperation grows

By Szu Ping Chan 07 May 2015

European Central Bank board member floats the idea of an "IOU" system to pay civil servants if country runs out of euros

Billions of euros have been pulled out of Greek banks since the end of last year, which has left banks reliant on a drip-feed of liquidity from the ECB Photo: bloomberg

Greece could start using a "parallel currency" to pay its civil servants if it runs out of cash, one of the European Central Bank's board members has suggested.

Highlighting the desperate situation faced by the country, Yves Merch, a member of the ECB's executive board and governor of Luxembourg's central bank, told Spanish newspaper La Vanguardia that Greece could resort to using "exceptional tools" to pay its obligations.

"There are intermediate solutions circulating, such as the issuance of a parallel currency or IOUs," he told the newspaper. "All these measures are among the exceptional tools that any government can consider if it has no other options. But all of them have a high cost."

His comments come as the country scrambles to reach a deal with international creditors and avoid a default.

The ECB has already analysed how such a scenario could play out. Officials told Reuters in April that creating a virtual second currency within the Eurozone might not be enough to keep Greece in the 19-nation bloc.

Analysis showed around 30pc of Greeks would end up receiving such "IOUs" rather than cash, which would put further pressure on Greek banks as workers dipped into their their savings.

Billions of euros have been pulled out of Greek banks since the end of last year, which has left banks reliant on a drip-feed of liquidity from the ECB. The central bank raised its emergency liquidity assistance (ELA) to Greece's banks by €2bn to €79bn on Wednesday, in a sign of further progress between Greece and its creditors.

However, a spokesman for the Greek government said "red lines" on raising the minimum wage and restoring pension payments remained. Gabriel Sakellaridis told reporters that the situation remained critical, but added that the country was committed to servicing its obligations.

"We won't go beyond the limits of our red lines. It's clear that we cannot cut pensions. There should not be an expectation on the part of institutions... that the government will back down on everything.

"When you negotiate, there should be mutual concessions."

The country repaid €200m to the International Monetary Fund on Wednesday as part of its bail-out agreement, but faces a more daunting €750m repayment later this month.

In a sign of defiance, Alexis Tsipras, Greece's prime minister, tweeted last night that he would meet the 600 cleaning ladies who have been re-hired by the Syriza-led government after being made redundant by the previous administration.

Mr Merch singled out Greece as the Eurozone's black sheep. “Rarely have I seen Europe so united, except for one country, on the need to follow the rules. Those countries wouldn’t like everything achieved in the past, the effort made, frustrated now that it is starting to bear fruit."

He also suggested that a Greek exit may be relatively pain-free for the rest of the bloc. "There have been defaults in the US and other monetary unions without political consequences," he said. However, Mr Mersh added that policymakers remained ready to defend the single currency "by all means".

"The markets have greatly underestimated the political will to save the euro," he added.

Meanwhile, Michel Sapin, France's finance minister, said that Eurozone policymakers remained determined to keep Greece in the Eurozone, but insisted that the country "must respect its commitments" to remain in the bloc.

Sarah Carlson, an analyst at Moody's said the risk of a Greek exit had grown, adding that any exit from the monetary union by a country would mark a significant change in how the euro area is viewed.

A poll by Paddy Power on Thursday indicated a 36pc chance of a Grexit.

Greece could use 'parallel currency' as desperation grows - Telegraph