Among the various alternatives open to Greece in the event of Euro-illiquidity, one option being discussed is the government's making its payments via the issuance of IOUs denominated in Euros. Some (Northern) commentators have described this as proof that Greece is financially becoming fit for the stone age.
Before rushing to such premature judgments, one should remember that paying via such IOUs or pre-dated checks is one of the pillars of commercial finance in most Northern countries. Except: it is not called 'IOU' or 'pre-dated check' but, instead, 'bill of exchange'. The commercial debtor pays his commercial creditor by signing a bill which confirms that cash payment will be made in, say, 90 days. The debtor can discount this bill at his bank and receive cash.
In short: there is nothing illegal or immoral about paying via IOUs or pre-dated checks. In fact, any check is nothing but an IOU on the part of the issuer. And if that check is issued by the United States of America as a Federal Reserve Note, then it represents an IOU on the part of the US Treasury which serves as 'legal tender for all debts, public and private'.
Now to Greece. My understanding is that the use of pre-dated checks has been a standard, albeit not official, form of payment among small (and perhaps even larger) businesses. My brother-in-law has an earth-moving and building supplies business and long before the crisis he used to show us the stack of pre-dated checks he held in safekeeping. He told me that a pre-dated check would have numerous endorsements before finally being presented for payment. Put differently, pre-dated checks were sort of a shadow payment system long before the crisis.
So what would be wrong if the Greek state started to make its domestic payments with pre-dated checks? There could be a legal problem. I am sure that the Euro-treaties stipulate that the Euro is the sole legal currency in all Eurozone countries. I wouldn't worry much about that because if the Eurozone has proven one thing so far, it is its skill to find 'creative lawyers' who can make a convincing case for just about everything.
Sure, there would be an initial shock where Greeks might fear that the end of the world has arrived when they receive a pre-dated check for their pension instead of cash but it should not take too long for Greeks to realize that if they receive money from the state in the form of pre-dated checks, they can also make their payments to the state in the form of pre-dated checks. Domestic payments by the state and domestic payments to the state are more or less in balance. Thus, by the time everyone gets used to the new system, there should be a well-functioning secondary market which intermediates pre-dated checks between payers and receivers.
What exactly would be the difference between a 'real Euro' and a 'pre-dated check Euro'? The 'real Euro' is backed by the full faith and credit of the ECB (and its shareholders) whereas the 'pre-dated check Euro' would only be backed by the Hellenic Republic. Naturally, people outside Greece will only accept the 'real Euro' as payment by the Greek state. However, to any Greek citizen, the Hellenic Republic ought to represent sufficient faith and credit. After all, the Greek citizens themselves are the Hellenic Republic!
Before rushing to such premature judgments, one should remember that paying via such IOUs or pre-dated checks is one of the pillars of commercial finance in most Northern countries. Except: it is not called 'IOU' or 'pre-dated check' but, instead, 'bill of exchange'. The commercial debtor pays his commercial creditor by signing a bill which confirms that cash payment will be made in, say, 90 days. The debtor can discount this bill at his bank and receive cash.
In short: there is nothing illegal or immoral about paying via IOUs or pre-dated checks. In fact, any check is nothing but an IOU on the part of the issuer. And if that check is issued by the United States of America as a Federal Reserve Note, then it represents an IOU on the part of the US Treasury which serves as 'legal tender for all debts, public and private'.
Now to Greece. My understanding is that the use of pre-dated checks has been a standard, albeit not official, form of payment among small (and perhaps even larger) businesses. My brother-in-law has an earth-moving and building supplies business and long before the crisis he used to show us the stack of pre-dated checks he held in safekeeping. He told me that a pre-dated check would have numerous endorsements before finally being presented for payment. Put differently, pre-dated checks were sort of a shadow payment system long before the crisis.
So what would be wrong if the Greek state started to make its domestic payments with pre-dated checks? There could be a legal problem. I am sure that the Euro-treaties stipulate that the Euro is the sole legal currency in all Eurozone countries. I wouldn't worry much about that because if the Eurozone has proven one thing so far, it is its skill to find 'creative lawyers' who can make a convincing case for just about everything.
Sure, there would be an initial shock where Greeks might fear that the end of the world has arrived when they receive a pre-dated check for their pension instead of cash but it should not take too long for Greeks to realize that if they receive money from the state in the form of pre-dated checks, they can also make their payments to the state in the form of pre-dated checks. Domestic payments by the state and domestic payments to the state are more or less in balance. Thus, by the time everyone gets used to the new system, there should be a well-functioning secondary market which intermediates pre-dated checks between payers and receivers.
What exactly would be the difference between a 'real Euro' and a 'pre-dated check Euro'? The 'real Euro' is backed by the full faith and credit of the ECB (and its shareholders) whereas the 'pre-dated check Euro' would only be backed by the Hellenic Republic. Naturally, people outside Greece will only accept the 'real Euro' as payment by the Greek state. However, to any Greek citizen, the Hellenic Republic ought to represent sufficient faith and credit. After all, the Greek citizens themselves are the Hellenic Republic!
Sounds interesting and if it was not an in Greece used system maybe I would have trusted it. How easy is it to falsify these pre-dated checks? How reliable are they really? Where have they been printed? It is already easy to falsify money, with even watermarks, etc. Why using this instead of real money? What is the profit of it? I really see no other reason than to cheat with it.
ReplyDeleteTried to learn more about it via google, but nothing is available on internet.
The only existing link to more leads to this blog, this post.
All what is hidden from publicity, is smelling dirty.
If there is somebody who can make me think different is welcome to react. With real proof of trustworthiness of this payment system. Photos of it. Websites. With English translation.
Wasn't it in a community near Volos where they tried out something like a new local currency some time ago?
DeleteA pre-dated check in a sense is not fiat money? Aren't all fiat moneyies a form of a check?
ReplyDeleteAs for the predated checks used in greek shadow business, well these are virtually non existant anymore. nobody accepts them out of fear when one goes to cash the check at the specific date there is no money to cash. then the owner of the check is penalized and is without the money that should have been paid. This system of payment caused the biggest collapse of the greek industry and commerce. Many business went bankrupt when checks started to bounce one after the other causing a huge dominoe affect. In one sense many bad business that needed to go did go under this collapse, but a few good business where pulled down along with the bad ones.
V
Yes, your first sentence is absolutely correct.
DeleteI didn't know about the failure of the pre-dated check system I was told about but, frankly, I am not surprised. My proposal would be different because the issuer of 'my' pre-dated checks would be the Hellenic Republic.
It's true what anonymous said. Before the crisis pre-dated checks had become very common. After the crisis nobody risks getting any.
DeleteIt seems clear now that the abundance of pre-dated checks in the years before the crisis were reflecting the acute stress in the system.
News about such a "system" could of course be quite detrimental for tourism. "Will there still be real money in the ATM's?" On the other hand the tourist season 2015 will probably be a disaster in any case.
ReplyDeleteOf course there would be 'real Euros'. If you pay with a 'real Euro', you get 100 Eurocents of value. If you pay with a 'pre-dated check Euro', you will probably get a bit less than 100 Eurocents of value. If you buy a 3-month 'pre-dated check Euro' with 95 'real Eurocents', you get 100 'real Eurocents' upon maturity and make a good return.
DeleteIf at a specific date as a Greek worker I were entitled to get paid a certain amount of Euros (e.g. my salary for March 2015 to by paid by March 25th), why should I accept a check to be paid later?
ReplyDeleteAnd when I need to buy food now, why should anybody else be willing to accept this piece of paper which eventually can be exchanged for real cash later.
Every reasonable citizen will encompass that maybe at that date it might be difficult to get cash, and due to this risk they will accept that piece of paper only at a reduced value compensating for the risk and possible trouble.
That is why in all countries who had financial troubles, all those IOUs immediately lost some value, eventually even a huge discount.
H.Trickler
In 2009 California payed its people with IOUs, due to being temporary bancrupt. And California, home of Silicon Valley, is not what you typically would call a failed state.
ReplyDeletehttp://en.wikipedia.org/wiki/2008%E2%80%9312_California_budget_crisis
So Greece should not have to be ashamed to follow the path of california.
True; I recall this now. Except I don't remember what form these IOUs took (pre-dated checks? Cash equivalent?).
DeletePre-dated Checks: http://www.spiegel.de/wirtschaft/kalifornien-schwarzenegger-laesst-schuldscheine-drucken-a-633946.html
DeleteTo months later california could pay: http://www.nytimes.com/2009/08/14/us/14calif.html?_r=0
>"California, home of Silicon Valley, is not what you typically would call a failed state."
DeleteIn California this childish comedy started because the two big political parties refused to fulfill their duty. This imho also is a clear sign of a 'failed' state.
In Greece I see the state failing by two mechanisms:
a) A succession of governments during more than 10 years not being able to reorganize their country in a financially sound way.
b) Most probably soon culminating in the dire fact that there is no longer the cash available to fulfill the most urgent requirements.
H.Trickler
In Greece as well nearly all political parties refused to fulfill their duty - reorganizing their country in a financially sound way.
DeleteThat is the main difference toward Portugal, Spain or Ireland who were as well deep in the mud but who are now on a good way.
A parallel currency like that is surely an option for Greece, because this is what we are talking about here the introduction of a parallel currency. Quite frankly I do not see the benefits in something like that. Why bother with something half-baked such as this and not go down the full road of a new currency switch and a fully independent central bank? The markets are going to perceive the introduction of IOUs as the first step towards that road anyway so there will be more capital flight from Greece in order to avoid the necessary capital controls and possible currency change. I think the fact that ideas such as these float around demonstrates one thing: how extremely difficult in every aspect an exit from the eurozone is. I think that this is the issue that everyone should be studying, how can Greece or any country get out of the eurozone and introduce a new national currency or make every country in the eurozone viable through some sort of debt management vehicle. The main issue with an exit is what will happen with the euro denominated external debt. In order for it to be sustainable on a realistic basis it would have to be either redenominated in the new national currency along with all previously euro denominated contracts or written down by a significant percentage by external creditors. The more one contemplates on the issue the more one understands the mess of the whole thing. Still, if we are to go down that road half measures won't do it and most certainly it won't do for it to be something like a temporary measure with a reentry in mind. Greece has been in economic limbo for too long. This is the main issue. Greece will recover regardless of the road it will choose if this road is paved in certainty and not ambiguity.
ReplyDeleteThis is all about the first of April, yes? I;m asking because the Aprils Fools' Days jokes in Greek media are not worse than the outrageous ridiculous things the Greek politicians tells us all year around.
ReplyDeleteOnly fools consider contents of a honorable blog from a experienced (retired) banker dated before April 1st as possible jokes.
DeleteH.Trickler