Finance & economics | Free exchange

Scrip tease

Greece could alleviate its shortage of cash by issuing IOUs, but only for a time

FOR the third time in five years, Greece is looking into the abyss. As in 2010 and 2012 the Hellenic Republic looks likely to run out of cash, and may soon miss scheduled debt repayments. But this time Syriza, Greece’s new ruling party, has alienated its creditors, making the previous solution (a co-ordinated default, coupled with a bail-out) harder to achieve. Yet a unilateral default might prompt the European Central Bank to withdraw its lifeline from Greece’s banks, leaving the country little choice but to abandon the euro—an outcome 84% of Greeks want to avoid. As Syriza scrabbles around for alternatives, a monetary trick sometimes used in such emergencies—issuing temporary IOUs, or “scrip”, in lieu of cash—is starting to look tempting.

Scrip can help governments conserve hard cash, something Greece certainly needs to do. It has debts of around €315 billion ($340 billion)—175% of GDP—and must make payments of €2.5 billion before the end of June. To find that cash it could start making some of its regular payments in paper IOUs, which can be used to pay taxes at a later date, rather than euros. The bulk of the Greek state’s annual outgoings of €80 billion is paid to its citizens—€22 billion in salaries, €35 billion in benefits. They would have little choice if the government decided to pay them in scrip instead of euros. If all government salaries had been paid in scrip last year, the country would have had a surplus of €27 billion euros, leaving plenty to pay back foreign creditors. Scrip itself would soon become a means of exchange.

Scrip has a rich history. Massachusetts paid its citizens “tax anticipation notes” instead of cash in the 1690s, according to a paper* by Richard Sylla of the Stern School of Business at New York University. These were swapped for cash once the anticipated tax had been collected. California used scrip in 2009. The recession had sapped revenues, and bickering legislators could not agree on a revised budget. The state began to pay benefits, tax rebates and other bills in “registered warrants” rather than dollars. In all, it issued 450,000 IOUs with a value of $2.6 billion.

California made the scrip more palatable by promising to pay annual interest of 3.75% on it. This persuaded some recipients to hold on to it, meaning that Californian residents were, in effect, lending to the state. For those who wanted cash, local banks initially agreed to exchange the scrip for dollars, thereby acquiring the right to the interest due. Within two months the budget impasse was over and the scrip was redeemed. That was only just in time: the big banks, worried about their growing exposure to the scrip, had stopped buying it.

Greek scrip would face bigger problems. California’s economy is eight times the size of Greece’s and its decent credit rating lent its IOUs some credence. A better analogue for Greece, which has an unemployment rate of 26% and a reputation for default, is Argentina. In 2001 the Argentine government, struggling to service its debts, started paying its citizens by issuing a tax voucher, the lecop. The country’s provinces began to pay salaries and pensions in scrip. According to IMF analysis the value of these new quasi-monies rose to 7.5 billion pesos ($2.4 billion) by the end of 2002, or around 50% of the value of pesos in circulation.

Argentina’s experience was much less encouraging than California’s. One problem was the proliferation of scrips: there were soon a dozen of them, including Buenos Aires’s patacon, Corrientes’s cecacor and Formosa’s boncanfor. That made trade between provinces difficult. What is more, Argentines spent scrip of any sort as soon as they could, and hoarded pesos.

Centuries of experience suggest that such a response is typical. In the 16th century Sir Thomas Gresham, an English financier, argued that if a country had two types of coin made of different alloys but with the same face value, the one containing more precious metal would cease to circulate. Citizens would spend the “bad” coins, and hoard the “good” ones. “Gresham’s law”—that bad money chases out good—applies to paper cash too. Shikuan Chen of Taipei University cites paper IOUs issued by China’s government in 1287 with a face value of a fixed number of silver coins. The people responded by hoarding coins, so the paper drove the coins out of circulation.

Payback time: Greece's financial dilemma, in graphics

The euro, terminated

The history of scrip suggests two problems if Greece resorts to it. In Argentina, the rise of scrip helped undermine the public’s confidence in cash in general. A system of national bartering based on an informal token, the crédito, blossomed. This system was created at a local level by merchants, not by the cash-strapped state. And rather than lift the government’s revenue the informal cash made it tougher to track income and profits, and thus harder to calculate and collect taxes. The euro area has small-scale informal currencies: Bavarians with misgivings about the soundness of the euro, for instance, can use the chiemgauer; Bremen has the roland. It would be ironic if Greece issued scrip to get around a revenue shortfall, only to find that scrip exacerbated the problem.

The second problem is bigger. Since any Greek scrip would clearly be less desirable than euros (it would be accepted by the Greek government for tax payments, but could not be used to buy foreign goods or services), Gresham’s law would apply. If Greek banks accepted scrip, they would soon be flooded with it and drained of euros, making it hard to pay the interest on their own debts. Scrip would have solved the state’s euro shortage, but only by shifting it to the banking system. So scrip is no silver bullet. It might be a way to buy Syriza a few months breathing-space, but the only long-term solution to the cash crunch is the tough one: the state must earn more euros and spend fewer.

This article appeared in the Finance & economics section of the print edition under the headline "Scrip tease"

Europe’s boat people

From the April 23rd 2015 edition

Discover stories from this section and more in the list of contents

Explore the edition

Discover more

China’s banks have a bad-debt problem

As is becoming increasingly obvious

Which country will be last to escape inflation?

A new dividing line in the global fight


How the “Magnificent Seven” misleads

Forget the supergroup of stockmarket darlings