Limited options to haunt Greece if banks run out of cash
In the event of a 'Grexit,' Greek banks may issue 'IOUs,' temporary coupons promising future payment, or may be forced to issue a new Greek drachma currency
By Andrew Jay Rosenbaum
ANKARA
Greek banks are almost out of funds, and the European Central Bank won't provide any more euros. So what happens next?
Greece could reach a deal with its creditors by Sunday, and receive funds from them to keep going. But what if that doesn't happen?
The government has closed Greek banks through next Tuesday. The Greek central bank doubts that they will have enough funds to open and do business.
This will effectively force Greece out of the euro. Banks will fail, and the entire Greek banking system will have to be restarted with new funds.
Issuing IOUs
The first step will be to issue IOUs, as former Greek Finance Minister Yanis Varoufakis proposed just before his resignation Monday.
An IOU, which means literally in English, "I owe you," is a promise to make a payment later. California issued this kind of temporary coupon to pay the state's bills after the Lehman crisis in 2008 left the state treasury empty.
Varoufakis, however, insisted that this would not be a “Grexit,” but rather a legal action permitted by the rules of the euro system.
The problem with Varoufakis' proposal is that the banks might never again have access to the euro, so IOUs would have to be issued in another currency.
Nothing would prevent Greek banks from issuing them in U.S. dollars or yen, of course, but that would mean a step out of the euro.
Issuing drachma
The central bank of Greece could also print the Greek drachma currency and give them to the banks. In this case, people who had €100 in their accounts would now have 100 drachma. But the drachma would not be highly valued by traders; it would just move to a much lower value than that of the euro.
But it would take time for trading and settlement systems for foreign exchange to integrate the new currency - possibly more than a year.
This means that trading in the new drachma would be very subdued, handled only between private partners, and this would pressure the value of the new currency even lower.
This is one reason why analyst George Kesarios believes that a move to the drachma would cost Greece more than half of the value of its current Gross Domestic Product.
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