In a note from this week, UBS economist Stephane Deo asks: Is Greece (already) printing its own money? Deo centres on two areas: The first is the expanding balance sheet of the Greek central bank via the ELA (Emergency Liquidity Assistance) a scheme by which the national central banks help in keeping the domestic banking industry solvent.
The other focus area is a little more intriguing and arcane. He asks specifically: Are quasi-drachmas being
Quasi-drachmas? Well what he’s referring to is a scheme whereby the state has paid hospital suppliers in the form of domestically issued bonds:
The Greek state hospitals accumulated arrears to suppliers during the period from 2005 to 2010. In May-June 2010, the Greek government decided to put an end to this practice and decided to take up this outstanding debt (law 3867/2010). In the following months, all the accumulated debt of public
hospitals and the healthcare system from 2005 to mid 2007 was settled on a cash basis. The amount was EUR1.5bn for the years 2005 and 2006, with an additional EUR240 million for the first half of 2007. A total of EUR5.6bn accumulated between 2007 and 2010, was settled with zero coupon bonds. This was the creation of the “Pharma-Bonds”.
These financial instruments are bonds, and have all the characteristics of Hellenic Republic Bonds: they bear international securities identification numbers (ISINs); they are negotiable on the Athens Exchange and they rank pari passu with other Greek debt. The government, in one of its press releases, notes that “bondholders who choose to discount these bonds at the banks will crystallise a 19% discount versus their original claim.”
We would argue, however, that they are more than just another bond issued by the Greek government. To be specific, they seem to us very akin to what economists call quasi-monies. These quasi-monies have appeared in a number of cases, usually put in place by government to find an escape valve out of nominal fiscal rigidities in the face of a financing issue. This especially happens in a case of a government of a monetary union that cannot print money to fund its deficit.
Deo goes onto compare these “Pharma-Bonds” to the famous IOUs issued in California in 2009, when the state no longer had the cash to pay some employees and vendors. Argentina did something similar during its famous debt crisis — creating quasi money vehicles when it could no longer literally create money.
And in the case of Greece, the pharma-bonds seem unusually money-like, in that they can be deposited with a bank, which can them pledge them as collateral for real cash.
If a country issues a bond as repayment, even temporarily, for a supplier, then there is no withdrawal of money from the private sector as no-one purchases the bond with cash. It is a form of barter in which the vendor provides a good to the administration and receives a financial instrument created ex nihilo from the same government.
This is quite complex and tortuous, but at the end of the day it is not that far away from money printing in Greece.