Germany's Schäuble raises idea of Greek 'parallel currency'

Germany's finance minister, Wolfgang Schäuble, has reportedly suggested a "parallel currency" might need to be created for Greece to run alongside the euro if the country’s bailout talks fail.

Schäuble raised the possibility of a second currency in a recent meeting, according to people familiar with his views cited by Bloomberg.

The sources said the minister mentioned the possibility of a parallel currency at a recent meeting "without endorsing it", but cited the example of Montenegro, which uses the euro but isn’t a member of the currency union. Cyprus and Kosovo also operate using "hybrid" currency situations.

The idea of using IOUs as a parallel currency received some support from ECB Executive Board member Yves Mersch earlier this month when he mentioned them as a possible “emergency measure”.

The plan would be that the Greek government could use IOUs denominated in euros, but redeemable only at some time in the future, in order to pay public sector workers and benefit recipients while still receiving its tax payments in euros proper.

Economists said this would allow it to keep up its international debt payments in euros, but suggested a parallel currency was not a genuine option, and may even hasten Greece's exit from the euro.

Although Schäuble has said before that he would not rule out a Greek exit from the euro, both he and German Chancellor Angela Merkel's official stance is that they aim to keep Greece within the single currency.

The German finance ministry, when questioned about the currency comments, directed reporters to Schäuble's interview with Les Echos this week that “we take note of the discussion but we are not commenting on it”.

Christian Schulz, economist at Berenberg, said bluntly that a parallel currency "would mean euro exit" for Greece.

"The ECB would not control monetary conditions in Greece anymore, but someone else would, presumably the Greek finance ministry."

The mere mention of a parallel currency showed just how dire the situation is for Greece, said Brenda Kelly, head analyst at London Capital Group, "especially since the notion is coming from Schaeuble".

She suggested that the issuance of a parallel currency or an IOU might keep Greece within the 19 nation bloc but would not come without its costs.

"The flow of capital from Greek banks has been swift over the past few months with the central bank having to raise its emergency liquidity assistance by €2bn earlier this month. One would imagine the introduction of a parallel currency would do nothing to stem that outflow. It is merely another step for Greece as they head for the exits."

Craig Erlam at Oanda said he thought Schäuble was "playing games in much the same way as Greek officials are" as the minister did not want to be perceived to be a pushover.

"I don’t see this as a realistic option as any Greek currency that entered circulation would be devalued enormously from the offset which would create big problems with debt repayments. I don’t see how a parallel currency would work with Greece remaining in the eurozone and I would be very surprised if we did see that."

Erlam suggested capital controls alongside some form of default would be far more likely.

IOUs 'could hasten' Greek exit

Earlier in May, Capital Economics's Roger Bootle said while resorting the the use of IOUs to pay public sector workers might serve as a brief stop-gap, "they would not solve Greece’s fundamental problems, which require an exit from the euro-zone and debt forgiveness - or default".

Bootle suggested an attempt to use IOUs as a parallel currency "might hasten Greece’s exit from the euro-zone".

Other analysts have noted that, having claimed Greek optimism surrounding the progress of a bailout deal had "no substance", Schäuble's comments dealt another blow to the chances of a quick solution.

Connor Campbell, an analyst at Spreadex, said: "At the very best, it looks like Germany is willing to push Greece as hard as it can until it buckles and abandons its ‘red lines’; at the very worst it suggests Germany is committed to preparing for the impending realities of a ‘Grexit’."