The drachma comes back

Posted on February 11, 2012 by

As Business Insider reports, quasi-currencies are cropping up in cash-strapped Western states like California and Greece:

Are quasi-drachmas being issued?

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:

…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.