Econintersect: Adam Lerrick of the American Enterprise Institute (AEI) has proposed an interim money system for Greece should the funding of Greek banks by the ECB (European Central Bank) be suspended upon failure to resolve the current debt crisis. The transitional money would be Euro-denominated deposit receipts within Greek banks and would serve to maintain liquidity for transactions within Greece, including the payment of taxes, but would not have any effect on base money supply. And, of course, it would maintain Greece as an EU-18 member, at least nominally. Converting back to the drachma would terminate any association with the EU-18.
The exchange rate between Deposit Receipts and euros will float in the forex market to ensure external balance for exports and imports.
The difference between Deposit Receipts and a parallel Greek currency (like the drachma) is that the amount of money existing is limited to be the euros on deposit in Greek banks. This has the effect of separating the fiscal and monetary systems – “Deposit Receipts cannot be diverted to finance fiscal expenditures.”
Econintersect has asked the question (of itself): If the Deposit Receipts float against the euro in order to balance the external account, how can 1 Deposit Receipt convert to 1 euro when the transitional period has ended? The best analogy we can think of is that of a bond. The market value of a bond can fluctuate based on market interest rates throughout its life until maturity when it is redeemed at face value. Since 1 Deposit Receipt is issued for each euro on deposit in Greek banks, that forces the redemption at “par” when the arrangement is ended.
Of course, the situation with Greece can only end with Deposit Receipts at “par” with the euro “naturally” if the prices of goods and services in Greece are the same as in the rest of the EU-18 (or perhaps with the average?). Otherwise the purchasing power of a Deposit Receipt will be greater or lesser than that of a Euro and the conversion will serve to enrich or impoverish the Greeks.
Perhaps this is what is hidden behind the seemingly innocent statement by Lerrick (emphasis added):
The new currency can be introduced quickly and will automatically reverse into the Euro system once stability returns.
Econintersect: If natural parity is what is required, the transitory period might be very long indeed.
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