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Germany's finance minister says Greece may have to invent a 'parallel currency'

Wolfgang SchaeubleREUTERS/Ruben SprichGerman Finance Minister Wolfgang Schaeuble speaks during a session at the World Economic Forum (WEF) in Davos January 25, 2014.

Greece may have to bring in a “parallel currency” if progress stalls with in negotiations with the country’s European creditors, according to outspoken German finance minister Wolfgang Schaeuble.

Bloomberg reports that Schaeuble mentioned the idea of Greece bringing in a second currency — which could be the first step to a messy exit from the eurozone — at a private meeting.

Schaeuble is seen as the major hardliner in Greece’s negotiations, who will demand extensive reforms for any money, and is sceptical of the whole idea of bailing Greece out.

The idea that Greece would issue some sort of IOU to cover public pensions or salaries has been floated by economists in recent weeks as an emergency measure, should the country run completely out of cash.

The government could issue this “parallel currency” and demand that it have the same value as the euro, but if the public didn’t have confidence in it a black market could open up. Capital Economics says this could create a “dual pricing system” in which the parallel currency was worth less than the euro, destabilising the whole economy.

During the worst parts of the euro crisis, the threat of Greece exiting the euro was seen as an immediate problem for the whole bloc. If the Greek banking system collapsed, other European countries feared it could drag the rest of southern Europe with it and destroy the monetary union.

This time many finance ministers are much less cautious and regard the possibility of a potential Grexit (Greek exit from the eurozone) as much less risky for their own countries. Some German officials have reportedly suggested Greece should be cut out of the currency union like a “gangrenous leg.”

Here’s a snippet from Bloomberg:

Germany is “ready to take this brinkmanship very far,” with Schaeuble in the role of “attack dog,” Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington, said by phone. “The risks of contagion to other euro-area countries from a deterioration in Greece is very low.”

Over the last few days the Greek government has suggested that a deal is getting much closer. Greek finance minister Yanis Varoufakis even said on Monday that he expects a compromise agreement to unlock bailout cash within the week.

But Schaeuble and Chancellor Angela Merkel have poured cold water on those suggestions, saying that there’s much more work to be done.

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