The European Central Bank (ECB) has analyzed a scenario in which Greece runs out of money and starts paying civil servants with “IOUs,” creating a virtual second currency within the eurozone, people with knowledge of the exercise told reporters.
Greece is close to having to repay the IMF about 1 billion euros (US$1.08 billion) next month and ECB officials are becoming concerned.
Although the Greek government has said repeatedly that it wants to honor its debts, ECB officials are considering the possibility that it might not, in work undertaken by the so-called “adverse scenarios group.”
Any default by Greece would force the ECB to act and possibly restrict Greek banks’ access to emergency liquidity funding.
Officials fear that such an action could push cash-strapped Athens into paying civil servants in IOUs in order to avoid using up scarce euros.
“The fact is we are not seeing any progress... So we have to look at these scenarios,” said one person with knowledge of the matter.
An ECB spokesman said it “does not engage in speculation about how specific scenarios regarding Greece could unfold.”
A Greek government official who declined to be named said there was no need to examine such a scenario because Athens was optimistic it would reach a deal with its international lenders by the end of the month.
Greece has dismissed a recent report suggesting that it would need to tap all its remaining cash reserves across the public sector, a total of 2 billion euros, to pay civil-service wages and pensions at the end of the month.
ECB experts have concluded that using IOUs to pay public-sector wages would probably fail to avert a full-blown crisis and could even threaten Greece’s future in the eurozone.
Those officials believe that up to 30 percent of Greeks would end up receiving such government IOUs, rather than payment in euros, which would only put further pressure on Greek banks because those workers would likely plunder their savings.
The banks would then be forced to tap increasing amounts of emergency liquidity funding or boost their capital base.
However, the banks could not use the IOUs as security for drawing down the emergency credit because the ECB would not accept them.
“The IOUs, I just don’t think it can work,” said the first person who spoke to reporters. “That could effectively be it, they would be out [of the euro].”
Those fears were voiced by others familiar with ECB thinking.
“With a parallel currency ... you are getting to something so tailored that you are almost in ‘Grexit,’” a second person said. “It is something that is outside the institutional set-up.”
A Greek default could force the ECB to intervene and insist that any security offered in return for emergency funding be cut in value to reflect the nation’s default status.
Greek officials insist that there is no plan for default. However, in a recent letter from Greek Prime Minister Alexis Tsipras to German Chancellor Angela Merkel, he said wages and pensions would have to take priority before repayment of debt if he was forced to make a choice.
The conclusions of the ECB’s adverse scenario group are in line with the message eurozone officials have been sending to Athens for some time, namely that they should not go it alone with radical measures.
For the ECB, the introduction of a type of second currency in Greece would also hamper it in setting borrowing costs in the eurozone.
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