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Scrip Money Not the Answer to Greek Tragedy: Economist

Monday, 13 Jun 2011 | 5:20 AM ET

As Germany and the European Central Bank battle over what to do next on Greek debt restructuring, or lack of it, one economist is predicting the answer could be scrip money, and lots more trouble ahead.

Angelo Cavalli | Photodisc | Getty Images

“What does it mean when a government pays its debts with scrip?” Carl Weinberg, the chief economist at High Frequency Economics, wrote in a research note on Monday.

“As we understand it, this is what the ‘voluntary rollover’ plan proposed by EU governments would have Greece do,” Weinberg said.

Scrip money is an American term for replacing cash with a kind of credit and Weinberg is warning of major problems if Greece is allowed to monetize its debt in this way.

“Instead of being backed by the reserves of the banking system, new bonds are backed only by the good faith and credit of the government that prints them!,” he said.

“If so, are the Greeks monetizing their debt with baseless scrip, setting the stage for a monetary meltdown to accompany the fiscal meltdown that is all but inevitable?”

If such a course where taken Weinberg predicts havoc.

“If the government were to default — or rather, when the government of Greece does default— this scrip will be worthless, wreaking havoc on top of economic chaos,” said Weinberg.

If people accept scrip as cash, Weinberg warns governments will be able to print money independently of the central bank, meaning the monetary policy will no longer be the monopoly of the central bank.

“This opens the door to excessive liquidity, and that can cause inflation,” said Weinberg.

“Scrip is not backed by hard assets, only the credit of the government. Thus, the money stock will implode if the government defaults on its debt, adding financial chaos on top of fiscal chaos.”

If scrip were on the table to pay down Greek debt, Weinberg believes the credit ratings agencies would need to give it a junk rating to stop it becoming valid collateral.

“Alternatively, the ECB could buy up all of it, turning it into real cash,” said Weinberg.

"Even if we see no other reason to reject the idea of voluntary rollovers, the threat to monetary stability posed by authorizing a sovereign government within the EMU to print money should be reason enough not to undertake it,” he added.

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