Greek Government May Introduce IOU to Help Economy Stay Afloat

As Greek banks remain closed after the country’s citizens rejected the terms of an EU bailout program with a “no” vote in the Sunday referendum, the government may have to introduce a second currency to be able to pay salaries and pensions, and keep the economy going, Belgian newspaper La Libre reported.

Without a new bailout program, Greek banks will have to use IOUs (the acronym for "I Owe You"), a temporary document acknowledging debt, to recapitalize its banking system.

"They [Greek officials] are considering drastic steps to boost liquidity and shore up the banking system… If necessary, we will issue parallel liquidity and California-style IOU's in electronic form," said now former Finance Minister Yanis Varoufakis, as cited by the Greek Reporter.

Varoufakis also stressed that the introduction of IOUs is not a prelude to a Grexit. The decision is expected to take place tonight, as the cash reserves of Greece's four major banks are about to run out fast, according to Louka Katseli, head of the Hellenic Bank Association.

Economists say that the Greek government will print IOUs to pay wages, social benefits, and even to pay its suppliers. The IOU is expected to have an official rate of one to one with the euro.

Analysts fear that a black market would open up as a result of this. Say the government pays a pensioner 500 IOUs a month, instead of €500. Things might get complicated when a pensioner decides to use the IOUs for shopping, for example. Merchants might refuse to recognize these IOUs as the equal value to the same amount of euros, thus making 500 IOUs worth €150 or even €100, said Holger Schmieding, the current chief Economist at Berenberg Bank, according to La Libre.

The introduction of IOUs can help the Greek economy, but only temporarily to help the government buy some time, while it's working to introduce a new currency. California did the same for a couple of months in 2009, as well as Argentina during its 2001 default.