The Card System, Demystified, and Implications for Re-Introducing Drachma

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Yves here. Please thank reader Clive for providing a detailed explainer on how card systems work and what the impact of a drachma re-introduction would be for them.

By Clive, a payments system professional

Perhaps the main reason well intentioned laypeople suggest what to them are obvious, simple solutions to implementing either a new drachma in Greece, or some sort of parallel running of both a new drachma and the euro, or a new cryptocurrency which somehow can be like a drachma or even both a euro and a drachma at the same time and so on (there’s been many other ideas proposed) which are nevertheless unfortunately completely impractical in terms of allowing a functional, reliable, robust, high volume payment system is that so much of the financial system’s complexity is transparent to the end user.

We’re lulled into a false sense of understanding by the ubiquity and apparent simplicity of the modern retail non-cash payments system which operates in most countries (we’ll concentrate on the retail system here, the sorts of things we as joe public use in our everyday transactions; commercial, business-to-business payments systems and “treasury” systems used by large banks and the central banks are different but no less complex, perhaps even more so but outside the scope of what we’ll discuss here).

We hand over our card, sign the ticket (or enter our PIN, or even just wave our NFC card over the reader) and know that in a couple of days at most, usually a couple of hours, our bank accounts will be deducted the relevant amount. We even use our credit and debit cards overseas, and as if by magic the correct local currency amount is converted into the currency in which our “native” bank account is denominated in and away the money goes.

The card payments system has evolved over the past 40 or more years to reach its current level of sophistication and automation. Over that time, various parties have carved out particular places in the overall system often at the direction of regulators who have insisted on fragmentation to avoid any one single part of the overall system being allowed to have dominant influence — and so provide an opportunity for rent extraction. While this is laudable action by the regulators the result is systemic complexity.

Let’s start by identifying who the various participants in a card payment transaction are:

1) The customer. That’s you, with your card presented for payment. You are known as The Cardholder in payments industry speak. You want to pay by either credit or debit card and aren’t using cash because either you don’t have the cash and need to use a line of credit or even just for convenience.

2) The retailers (this could be a hotel, a restaurant, supermarket, a bar or whatever) — the place you’re presenting your card for payment to settle a bill. These are known in the industry as the “Merchant” so that is what we will refer to them from hereon.

3) The Merchant Services Provider. Now we’re into the realm of things which end users of payments systems probably don’t think too much about. Who are Merchant Services Providers and what do they do ? Well, the machine you put your card into (or the Merchant uses to swipe you card) wasn’t left there by the tooth fairy. Someone built it, someone owns it, someone has to maintain it, update it such as to apply security patches and even periodically replace it when the hardware it contains doesn’t support new features which are deemed necessary such as Chip and PIN authentication, or “contactless” (using Near Field Communications) payments etc. This hardware is commonly referred to as an “EPoS” (Electronic Point of Sale) terminal. It costs the Merchant Services Provider money to supply and support the EPoS terminals, so they charge the Merchant a fee. This can be either as a high “one off” cost to buy the EPoS terminal or the Merchant Services Provider can “give away” the terminal for a low nominal cost but then levy a fee on each transaction the Merchant completes using the terminal for taking card payments.

In Europe (and this includes the eurozone, Greece too) the number of Merchant Service Providers who supply of EPoS terminals has grown like topsy over the last decade or so. This is because it can be insanely profitable — the EPoS terminals are fairly cheap to manufacture in bulk, support can be crapified but those transaction fees just keep rolling in. Here is a typical offer (this one is from PayPal but there are dozens and dozens of Merchant Service Providers offering different EPoS devices, different tariffs and supporting different EPoS features as well as other services like how you are able to manage your account with the Merchant Service Provider).

4) The Card Network. You, the user (or The Cardholder) has a card. That card is produced under licence, the terms of which are specified by the Card Network. Well known Card Networks are Visa, MasterCard, American Express – but there are several others. Some operate just in one locality, most try to offer a good range of international acceptance. But what exactly do the Card Networks do and, perhaps more interestingly, what don’t they do when you present one of their licensed cards for payment ? Firstly, the Card Networks do not remit funds between the Cardholder (you) and the Merchant. Secondly, the Card Networks do not define the currency in which the transaction is to take place. Nor do they transfer the jurisdiction where the payment and settlement takes place from or to any other country.

So what do they do ? Well, when you (the Cardholder) presents your card to the Merchant, the Merchant uses their EPoS terminal to acquire (that is the industry standard wording) the card details and the transaction amount. The EPoS terminal appends some other details such as the location of the transaction and the currency in which the transaction is to be denominated in (such as U.S. dollars, Yen, sterling, euros etc.) using the software built into the EPoS terminal itself. It then sends this information to the Merchant Services Provider. But all any of the parties to the transaction know so far is the above – no one can yet say which bank (your bank, the bank account for you, the Cardholder) is going to have to make the payment from.

Here is where the “magic” (it isn’t actually all that magical) of where the Card Networks comes in. They know, from the card number (called the PAN or Primary Account Number) which is printed on the card (and also stored in the magnetic stripe and also the card’s Chip, if present) exactly which bank issued the card. The Card Issuer – see item 5 below – agrees to provide the Card Network with at least a daily figure (in the currency which the Card Issuer has denominated the account you have with them) for your line of credit on the card. Sometimes the Card Network has the facility to check in real time what your available funds are on that card. Sometimes not. But as a minimum, it knows what you’ve got that day. Assuming you’ve got sufficient funds to cover the transaction, the Card Network then tells the Card Issuer what you’ve just spent on the card and simultaneously tells the Merchant Services Provider to send a message to the Merchant’s EPoS terminal to authorise the transaction. The EPoS terminal then issues a message to the Merchant that the transaction is authorised and triggers receipt printing (or an equivalent action to create a record of the transaction being complete). This, effectively, marks the end of the Card Network’s involvement in the transaction. Then the action moves to…

5) The Card Issuer. This is your bank, the one who gave you the card. The one who just confirmed you were “good” for the money to the Card Network. When a Card Network told the Card Issuer that you’ve just spent some money, the Card Issuer (usually) earmarks your account to say that your available funds have decreased by the corresponding amount.

But what amount exactly ? If this is, for example, a U.S. dollar denominated account and you’ve just been to the supermarket in Scottsdale, AZ, it’s fairly simple. The Card Issuer needs to send U.S. dollars to the supermarket’s Merchant Services Provider who will then send those dollars to the supermarket’s bank account. Note – this is very important so pay attention here – it is the Card Issuer who sends the money to the Merchant Services Provider NOT the Card Network.

But if instead of going to the supermarket in Scottsdale, you’ve been to the supermarket in Woking, England, the supermarket’s Merchant Service Provider wants settlement in pounds sterling. So your bank, the Card Issuer, has to check the transaction information it was sent by the Card Network and analyse it for the currency it was denominated in. The Card Issuer must, if the transaction was denominated in a currency other than that in which your account with them is denominated in, calculate the (in this case) U.S. dollar equivalent of the sterling amount it must send. It can then debit your account in dollars and send sterling to the Merchant Services Provider. The Merchant Services Provider can then credit the correct sterling amount to the supermarket’s bank account.

So, dear long suffering reader, having read and hopefully digested that glossary of the various actors in the card processing and payments systems hopefully you can now begin to understand why, if any single part of the system changes (such as Greece wanting to re-drachma-ise) the entire system has to be considered. You can’t, for instance, simply say that an EPoS terminal in Greece is now no longer presenting transactions denominated in euros but instead is expecting to settle in drachmas.

The Merchant Services Provider whose terminal it is needs to change the transactions its EPoS terminals are sending to the Card Networks from euros to drachma. But both the Card Services Providers and the Merchant are separate commercial entities and supply / utilise services under contract. They may both be in different jurisdictions (under EU law, I can buy that PayPal EPoS terminal in the U.K. — I can buy one that is natively denominated in sterling, euros or even U.S. dollars — and I can take it and use it in any EU country).

Greece could introduce legislation to the effect that its sovereign currency was now the drachma not the euro. But who would actually be liable to make changes to their products and services to abide by that legislation? The Merchants and their banks in Greece would obviously have to then legally denominate their transactions in drachma, but that would not change the configuration of those thousands, more likely hundreds of thousands, of EPoS terminals installed in Greece.

Merchant Services Providers who were domiciled in Greece would have to make changes (ones like PayPay would not be bound by Greek law as they operate in a different, centralised, jurisdiction, which is Luxembourg in the case of PayPal in Europe but would probably start to do so for commercial reasons but it would take time to either produce and distribute new EPoS terminals for use in Greece or upgrade the firmware in existing terminals, if this is even feasible) but it would be no use them starting to fire off transactions to the Card Networks saying “drachma” if the Card Networks (who are definitely not Greek) didn’t also make changes to know what to do with them. And the Card Issuers would have to be prepared to remit funds to the Merchant Services Providers in drachma. But they too would have to change their systems to be able to handle that currency type.

Note too that each of these parties are entirely different and run different sub-systems which interface to each other but are not tightly coupled under a single codebase or managed under a single change management system.

And what of cryptocurrency, dual running of euros and drachma, or other similar bright idea? As readers can deduce from the explanations above, the payments system outside of cash is just that — a SYSTEM. You cannot simply change one component in it in isolation. Either a cryptocurrency is designed to the same specification as a card licensed by a Card Network and so can use the existing infrastructure (in which case it is a proprietary product issued under licence from the Card Network and as such production can only by authorised by them — meaning that a cryptocurrency was really just another version of an existing Card Network’s card) or else it is something new and thus requires new EPoS terminals and Merchant Service Providers capable of handling cryptocurrency payments.

To those who might suggest that Greece could revert to a cash only society for a time until the card payments system was modified it is worth noting that for some industries – notably lodging, rail travel, car hire (all of which are important sectors in Greece because they are part of the tourist industry) – have a very high percentage of settlement via card payments. This is because customers do not carry sufficient cash to cover these larger bills or even, for vacations especially, do not actually have the cash available and need to tap a line of credit. And for car rental, for example, some sectors have evolved to become entirely dependent on card payments. It is very difficult to hire a car without a card being used to pre-authorise the likely bill and to allow the car rental company to get an irrevocable deposit should you damage the car. If you don’t have a card to use, you need a huge cash deposit, often $1000+.

And cash societies are very susceptible to regressing to a black market economy with the predicable implications for a government’s ability to secure tax receipts.

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  1. charles 2

    This is why Greece will fight to the bitter end to keep the Euro, including printing banknotes (yes they can, they have the plates for 5, 10 and 20 euro notes) to fill the ATMs. They will do this until the rest of the eurozone understand that euro is drachma, and that redenomination is actually its problem.

    1. Clive

      Unfortunately not. The ECB controls euro note production and issuance, regardless of how we, or Greece, feel about this. Greece is bound by treaty to produce euro notes in accordance with the ECB’s stipulations. To quote

      “The ECB closely monitors the stock and circulation of euro banknotes and coins. It is the Eurosystem’s task to ensure a smooth and efficient supply of euro banknotes and to maintain their integrity.” (emphasis mine)

      If Greece were to issue new euro notes outside of the ECB’s permission, the ECB would, using the provision that it must “maintain integrity” (of the euro) take steps to rein in Greece. They would not hesitate, worse-case, to declare Greece’s “screw you, ECB” euro notes counterfeit.

      1. Robert Dudek

        What about the Greek government issuing citizens prepaid debit cards denominated in euros?

        1. Clive

          Study the roles of the parties detailed in the above numbered 4) (the Card Nerworks) and 5) (the Card Issuer).

          What you are suggesting is that The Bank of Greece become a Card Issuer. But Card Issuers have to be licensed by a Card Network and operate within that licence. Becoming a licencee takes time. The Card Networks are not Greek entities. They would not look favourably on a chaotically implemented introduction of several million new cards under dubious legality.

          And the cards would have to be manufactured and distributed — a process which would take months.

          Also none of this resolves the problem of such new euro creation being outside of the ECB’s agreement (see my earlier comment on this). While it is fun for us to imagine Greece acting like some sort of cavalier gangster state, reneging on its treaty obligations and sticking two fingers up at the rest of the world, countries which try is soon get rough treatment back in return.

          1. Robert Dudek

            Neither the Eurozone nor the ECB has been following their own rules for quite some time. Please remember that they are the gangsters.

            1. bh2

              Yes, I particularly chuckled over the phrase “Greece is bound by treaty to produce euro notes in accordance with the ECB’s stipulations.”

              Nations have the sovereign right to withdraw from treaties — and do so when they become toxic. If Greece is basically walled out of the EU, then any suggestion it must obey EU “rules” is risible.

              And while cash economies may be regarded as a throw-back, they have certain advantages which the Greeks might prefer. Hiding money from the government, in particular.

              Cash in hand still works in many parts of the world, particularly in places where hard currency is preferred to the local sort. Travelers cheques solve the problem of safely carrying cash in foreign denomination for spending when and as needed — a function they served very well for many years.

              Moreover, the Greeks could presumably adopt any other currency as their own (ala Ecuador). Dollarized economies don’t require permission of the US government. And the adopting state enjoys the benefit of transacting in a hard currency freely accepted world wide without question.

              1. Lambert Strether

                Please be serious. The comment starts out arguing that the Greeks will do anything to stay in the Euro. You “chuckle,” and argue they can withdraw from the treaties. The two opinions contradict.

                And I’ve got to say this part of your comment is a real “with friends like these” moment:

                Travelers cheques solve the problem of safely carrying cash in foreign denomination for spending when and as needed

                Now, I love traveller’s checks and use them. But I’m the only person at my bank who does, it’s a cumbersome process at the bank, and it’s a stressful process at the other end (because I’m one of people whose signature never comes out the same way twice). I think very few people are going to want to switch back. (I can’t find stats in a quick search, but usage has been declining since the 90s).

                Tourism is 18% of the Greek economy. So what you’re saying is that the Greek tourism industry should market itself by saying traveller’s checks are a requirement? With friends like these…

      2. Jose

        The ECB could declare no such thing because euro banknotes are not distinguishable by country of issuance.

        On each euro banknote there’s a serial code containing a country letter but this identifies the National Central Bank that commissioned the printing of the notes – which may or may not be the NCB that issued them (notes are distributed around the NCBs between printing and issue; also, an NCB may reissue notes previously issued by other NCBs that it has redeemed).

        Notes drawn from a bank in a particular eurozone country may thus have any country letter.

        If Greece leaves the eurozone and continued to issue euro banknotes (this is all hypothetical, of course) there would have to be border controls to prevent banknotes from leaving Greece and/or the remaining eurozone countries would have to change the design of the notes to distinguish them from Greek “euros”.

        1. Clive

          Each euro banknote has a unique serial number. The ECB could at an hours notice or less send an advisory that bank notes containing specific serial numbers are to be considered forgeries (this is an existing process — bank tellers get a daily list of notes’ serial numbers which are known forgeries and cash processed at banks’ cash handling centres are put through high volume scanners to spot the offending serial numbers).

          Yes, Greece could act as a financial terrorist. You and even I might think this is justified. But who would suffer the consequences of the inevitable international retribution ?

          1. Jose

            Yes – but the specific serial number does not identify the National Central Bank that issued the note.

            Banknotes issued by the Bank of Greece are indistinguishable from the banknotes of other euro countries. The system was thus designed because EMU was supposed to be for eternity.

            1. Clive

              The other Eurosytem currency issuers know exactly what serial numbers they have generated and printed on the notes. They would fully co-operate with the ECB and provide real-time information on the notes they had issued, their denomination and the associated serial numbers. The ECB would make a declaration that any notes not bearing those serial numbers had not been validly issued by the ECB or their agents and were to be treated as forgeries.

              Yes, the Eurozone and euro note users would be presented with substantial additional work, aggravation and costs. Every single person in the Eurozone would have to regularly check their euros for validity. How would people react to Greece and its government ? The German tabloid press would be demanding air strikes on the counterfeiting note presses. The Daily Mail would run headlines day after day trying to scare middle England brits into not daring to venture across the Channel. U.S. citizens (and sorry to denigrate here but it is proven by history) suspicious at the best of times on how “backward” anything outside of U.S. territory is and not exactly known for their willingness to venture into what are perceived as trouble spots internationally would stay away in droves. I am not kidding here, this is exactly the sorts of reactions such moves by Greece would result in. Are you seriously trying to help here, or just having a laugh ?

              1. Lambert Strether

                Clive shows why it’s important to master the detail.

                It’s important to the Greek people.

                You can’t assess true power relationships without understanding the systems in which they are embedded (and not just in a “good guys”/”bad guys” way). And if you can’t assess power relations accurately, then you’re going to lose every war you fight, every time.

                Which is what — follow me closely here — the left has been doing for generations. Coincidence? You be the judge. The left needs to walk (fight for justice) and chew gum (understand power) at the same time.

                “Know your enemy and know yourself.”

      3. fresno dan

        Its turtles all the way down.
        (my point is that no matter how obscure the payment system, real money from real people for real products and services has to happen. It only gets sketzy when we bail out bankers and politicians for making foolish decisions and keeping the rich from taking any losses).

        And I haven’t seen such a good explanation of financial transactions since the bank teller explained to Leonardo DiCaprio how checks clear in the movie “Catch me if you Can”

  2. which is worse - bankers or terrorists

    Fantastic work Clive! And of course not to mention Yves. Thank you once again for the best blog out there right now. Three questions:

    (a) Has anyone seen a definitive analysis around whether a July 20th default on the ECB will trigger CDS, and what specifically that will mean for the acceleration of other debts, and accordingly what that means for the global financial system?

    (b) The vote today looks close based upon polls. Has anyone seen any political analysis if this ends up as a nearly 50/50 split. Clearly it would not appear to be good to have decisive decision.

    (c) Rumors abound that some of Greece’s banks might run out of money (collapse) on money. Where do go on information for which ones are most vulnerable?

    1. Yves Smith Post author

      Thanks for the kind words. but Clive deserves all the credit.

      I have an answer only on A. The sovereign CDS market is small and I have to think that there is not much in the way of Greek CDS, and they they’d have default risk priced in. Counterparties have to post collateral based on current values. So CDS aren’t a systemic event trigger, unlike the CDS written on subprime mortgages, which were a huge multiple of the underlying value of a very big market.

      1. Dejan

        There is also the cross-default provision.
        “A clause which operates by automatically defaulting a borrower under Agreement A when it defaults under Agreement B.” .

        Greece should have this clause in some agreements, so some creditors should be able to call default and be able to accelerate payment.

        And than cross acceleration comes into play: “clause in Agreement A causes an event of default under Agreement A when the borrower defaults under Agreement B, only if the lender under Agreement B accelerates repayment.”

        1. Yves Smith Post author

          I believe the EFSF (the biggest of the two funds through with the Eurozone countries loaned to Greece) has a cross default clause but the Eurozone lenders have not chosen to invoke it.

  3. Jesper

    Surely the payment system is set so that it is possible to add a new currency?
    There must be a well documented process on how that is done or?

    The EPoS that I’ve come across are capable of handling transactions in multiple currencies – I’ve been given the choice between a SEK price or a EUR price when traveling abroad. (Get to choose who rips me off on exchange rate but still…) Such EPoS might reduce the complexity or will it add to the complexity?

    1. Nathan Tankus

      you misunderstand. The reason these systems can process different currencies is because there is an ISO file with all the country and currency codes that are current telling it what a legitimate transaction is. the greek country code currently is euros. until they all update their ISO codes (which requires international agreement which takes time) these payments will most likely not be processed at all. some payments maybe processed weeks at a time. it’s too decentralized to update all at once. updating ISO files country codes alone in the run up to the euro took months. there’s a process in how to do this. it’s a process that takes months.

    2. Clive

      Yes, definitely. Some EPoS terminals and the Merchant Services Providers that supply and support them are multi-currency capable. The Merchant selects the currency the transaction is to be denominated in on the EPoS terminal and the terminal and the Mercbant Services Provider does the rest.

      Note though that there are currently NO drachma denominated EPoS terminals in existence. This is because there is no standard defined in the card payments system for how to handle drachma.

      But please also re-read and study the information in the above article. It is not sufficient for just the EPoS terminals to be updated. The transaction is settled between the Merchant and the Cardholder by the Card Issuer (your bank) and the Merchant Services Provider. Each and every party in the transaction must provide compatible interfaces and so each would need to update their systems to send (from the Card Issuer) and receive (by the Merchant Services Provider) drachma. The Card Networks too would have to be able to process transaction authorisation messaging in drachma.

      Changing EPoS terminals in isolation achieves nothing.

      1. Jesper

        I see the danger of making multiple points in one post :-)
        I didn’t say that all that was needed was to replaces the EPoS, what I did imply was that some EPoS might not need to be replaced.

        My original questions still stand unanswered:
        Surely the payment system is set so that it is possible to add a new currency?
        There must be a well documented process on how that is done or?

        1. Ben Johannson

          Surely the payment system is set so that it is possible to add a new currency?

          Not quickly. Weeks, possibly months.

          1. Lambert Strether

            And the ISO process is months, possibly years.

            Further, ISO is committee driven. So if Germany or worse Finland raises an objection to Greece’s coding, the process could stretch out.

            (ISO is a slow-moving, rule-based, multi-layered entity because that is exactly what you want for an institution that writes international standards for data, capital goods, industrial processes, consumer goods, process models, etc. “Let’s put on a show!” doesn’t work at ISO.)

            1. vlade

              While I agree with you, I really hate to point out something that people were ignoring. When Czechoslovakia split, there was intention to keep a common currency. That lasted all of 60 days or so, and at least Slovaks were caught entirely by surprise (CZ banks seem to have had a bit of a heads up, if not that much).

              So, literally overnight, CSK (Czechoslovak Koruna) disappeared and was replaced by CZK and SVK instead. And the banks, which had a not-very-sophisitcated IT at all at the time handed it ok. Admittedly, the situation was different in a lot of respects (no cards for example, so the problems Clive mentions wouldn’t be problems, and it would mean not many ATMs either etc.etc.), but a currency split can be done under duress quickly.

              If Greek banks had absolutely no crisis plan for Drachma (not implemented, but prepared etc.), then, after the years of looking at it, they deserve the chaos they are likely to get.

        2. shash

          As I understand it,…

          Yes, but it’s a very long, drawn process. It requires changes all the way up and down the network on all the different systems mentioned in the article. It would take several months just to make the changes, and probably upwards of a year to actually put it into practice.

          In other words, even if everyone agrees that Greece goes back to Drachmas, it’ll take at least a year for it to come into effect.

        3. Clive

          No worries :-)

          Yes. Definitely. The system is implicitly designed to accommodate new currency types. The introduction of the euro is a case in point. In fact, the loosely-coupled nature of the system actually helps with the ability to robustly implement change such as new currency codes. But what is then compromised is the ability to introduce change quickly. This is because no-one has overall control of all components.

          1. fajensen

            As someone who has worked with telecom and military systems, where there definitely *is* “control of all components”, it must be said that the centralised change control that all System Managers dream about is in fact *far worse* for “introducing change quickly”.
            Critical systems, for nuclear deterrent (no less) are stil running on 1960’s tech because going through “The Change Process” is more ardous than keeping a few certified factories open!

          2. Jesper

            Cool :-)

            What I might add is that I believe the complication is at the back-end. When the back-end accepts accounts and transactions in the new currency then the hard part is done.

            If/when a new currency works at the back-end then merchants would most times get to select which currently they get paid in. (my guess is that they’d rarely select the new currency). The time the merchant would not get the option to select which currency would be if the card is linked to an account in the new currency. Or maybe they’d always get to select the currency but the exchange rate would be so crappy that the choice would in practice not happen.

            So therefore I believe that once the new currency is supported at the back-end (bank accounts and transactions allowed in the new currency) then the rest will be relatively easy.

            If the process for defining and adding a new currency is well written, then it should (?) be possible to make a reliable estimation on how long time the process will need . For all we know (maybe not so much) there might be one currency already pre-done in the system and once a decision to add a currency is made then that new currency can be put in place quickly. Then another ghost currency is created for the next currency to add. And so on.

            1. Lambert Strether

              There “might be,” sure. Anything’s possible. However, if a new currency code is needed (and my understanding is that it is, because the code for the Drachma was abolished) then the place to look is the ISO process, which is open (one of the many good things about it). So absent proof that there’s a proposal for a new code at ISO, I’m going to assume there’s no “pre-done system.”

              I doubt very much there are “ghost currencies” lying about. I can see how there would be templates for individual systems, but I don’t see how ghost currencies would work in the multi-system distributed network that Clive describes.

              1. TheCatSaid

                Fascinating to consider the possible existence of “ghost currencies” in the ISO system–not so much in relation to the current Greek crisis, but in relation to money laundering, etc.

                Maybe it’s already happening. New revelations consistently exceed the supposed worst-case scenarios.

                1. fajensen

                  Well, after SWIFT got “instrumented”, the crooks apparently moved money via the ludicrously insecure, naively implemented and poorly supervised carbon credit system.

                  Connie Hedegaard became “European of the Year” – who knows – maybe the European Commission needed a conduit for fraud and black money?


                  “Arne Anka” was trading millions out of a corner kiosk in Copenhagen, for years.

                  1. TheCatSaid

                    Good point–that “ghost currencies” can take unexpected forms, allowing them to fly beneath the radar

                    On another thread I referred to Trade Credit Offsets (TCOs) in the context that they could perhaps be of use to the current Greek government. Your point makes me realize that TCOs could function for any party as an effective “ghost currency”.

  4. Cano Doncha Know

    Although this article provides some useful technical information, I have some issues with it.

    I think that most who are following this story, and most Greeks, are aware that financial crises create chaos, and the chaos is only magnified with a currency change. The stories of other countries whose currencies have collapsed, and who have had to reissue new currencies, tell of cryptocurrencies, simultaneous running of multiple foreign currencies (euro, dollar, etc) with the failed local currency, and thriving black market economies (not that we in the US would know anything about that). We know that financial crises, banking crises, and currency crises create, er, crisis, and shock, and, suffering, and death.

    I think that is assumed in the discussion Greeks are having. NO ONE is suggesting that ANY solution is “obvious” or “simple.” That is a straw man argument, obviously and simply. The people who are arguing in favor of the drachma are arguing that reverting to the drachma will cause extreme, life-threatening economic, social, physical and other hardship. However, they are arguing that so will sticking with the Euro. The way I see it, the discussion is about consent. Are the Greeks consenting to this rigged system which says that it’s their “choice” to suffer or not suffer, or are they not consenting. Either way, they are not consenting. To suggest that the way Greek’s vote in this election could put them at fault is wrong.

    It is preposterous to suggest that if economic Armageddon ensues, it is somehow because the Greek people don’t know what an EPoS terminal is or that when you swipe your credit card at Lidl you are assuming the subjectivity of “Cardholder.” That implied suggestion takes away from what would otherwise be some useful technical information.

    Further, when we talk about democracy, we talk about citizens, and people. To use the term “laypeople” in the seventh word of the article wreaks of technocratic ideals. Technocracy, roughly, is the replacement of democratically elected government officials and processes (i.e. elected officials and referendums), with the rule of non-democratically elected “experts,” decrees and technical systems. Technocracy makes use of highly inaccessible technical jargon to convince us that citizens and people are unfit for the everyday work of creating, maintaining, and building democratic government. This is the very essence of the discussion in Greece as that is exactly the Troika mission.

    1. Clive

      I did rather agonize over using the word “laypeople”. It has unavoidable connotations of, for example, the English peasantry being forced to rely on “interpretation” of biblical texts by priests, priests who were ordained to fulfil this “teaching” role by organisations which, let’s just say had a somewhat vested interest in making sure that what people knew and what they thought was guided along very particular lines. And I can’t hear the word “laity” without being forced to recall that old joke “that’s no laity, that’s my wife”.

      But that is the word I opted for because it is appropriate here. Big finance, central banks, governments, the EU, the IMF and so on are an orthodoxy. Through various inducements, paid shills in the media and economists in academia dispense knowledge selectively and often based on huge gaps in their own understandings with either the sole purpose of — or at best a consequence of — keeping people ignorant. There are precious few channels available to even start to turn this tide of wilful misdirection and, therefore, control of what people think.

      Naked Capitalisms one of a tiny, tiny, handful of such outlets. One of NC’s stated editorial aims is to make sure that readers leave smarter than when they started. You stop being the laypeople and instead you are the experts. Sometimes, that knowledge goes against what we’d like to hear. It has been the source of great sadness to me that a not insignificant number of people have railed against what is a reality (in this case, a description of How the World Really Operates in the above piece) and instead taken pot shots at the various messengers who try to provide factual information about what actually is, rather than what we’d like it to be.

      When an entire country gets governed by a party (that’s you I’m looking at, SYRIZA) who is in some cases even more misdirected, this is even more a cause of concern for us all. If that government states it is anti-neoliberal, but nevertheless ends up incompetent because it apparently does not understand the very basics of how an important part of the country it is supposed to be governing works on the ground, the anti-neoliberal cause is set back years, decades even. We cannot afford to let this go unchallenged.

      We can only challenge it by getting an understanding of how finance works, in all its forms, for ourselves. It is my earnest wish that every reader takes the knowledge I’ve tried my best to convey and utilise it to counter wrong thinking wherever they find it and if they are proposing a solution to the very real problems which are (for example here, in Greece) faced to do so in a way which doesn’t play straight into the hands of the embedded established economic theocracy by being flat out wrong.

      1. Will

        Thank you for the informative article and thoughtful response here Clive.

        As a long-time reader of NC, one of my biggest take-aways is that the financial system is more complex than I can understand given the time I have to commit. I´ve learned a lot about various scams, slimeballs, corruption mechanisms, alternative monetary and regulatory possibilities, etc, but the ultimate degree of understanding is such that I could run the show if I had to (i.e. king for a day; also the ideal amount of understanding for a voter). There´s simply too much complexity to keep track of, and it can change very fast, reducing the value of previous time invested in learning.

        It seems like a simple democratic imperative that a society not depend on systems too complex or opaque to be governable by everyone. In this case, Greek society is dependent on a (complex financial) system which keeps it beholden to powerful people who want to extract wealth from them. It´s useful to understand that system to know what our near-term options are, and longer term (but starting now) the discussion ought to include how to depend only on systems that don´t require experts to explain or outsiders to maintain.

        As a useful contrast to this complexity, many native societies I´ve studied made ´awareness´ practice a major focus of their spirituality and daily life. Because technologies intermediated less (or not at all) between individuals and the ecological and human systems they depended on, each individual could be extremely aware of their dependencies – the health of the trees, size of the herd, volume of river water, etc. This ability for each individual to be aware of their dependencies without expert intermediation made it much easier for individuals to influence group behavior for the benefit of the whole.

        This reminds me of a programming maxim: ¨There are two ways of constructing a software design: One way is to make it so simple that there are obviously no deficiencies, and the other way is to make it so complicated that there are no obvious deficiencies.¨ Substitute ´financial system´ for ´software design´, and the same applies.

        In the societies I´ve studied, the elders, including elderly women, were deeply respected for their wisdom and leadership. In modern civilization, elderly women are considered obviously too ignorant to make important decisions or even have informed opinions about important topics, as demonstrated by Bloomberg´s ¨Greek Grandmas¨ article a few days ago. The answer to this sad situation isn´t just to teach people all the ins-and-outs of the current complexity, but to demonstrate the need to dramatically simplify.

        1. TheCatSaid

          Brilliant comment. Transparency requires simplicity to be effective. Pages of fine print don’t equal transparency.

        2. Lambert Strether

          That may be so. But it’s no help to the Greek people in the near term. Here are two more Programming Proverbs:

          1) “The cheapest, fastest, and most reliable components are those that aren’t there.” Like a payment system?

          2) “When in doubt, use brute force.” But do the Greek people and government have the operational capability to do this? If recognizing the problem to which force must be applied* is the litmus test, then no.

          And for the Eurocrats:

          3) “It’s not that XXXX programmers are idiots, it’s that the language rewards idiotic behavior in a way that no other language or tool has ever done.” For the economic language of neo-liberalism (or for the Germans, apparently, ordoliberalism, the bastard offspring of classical and Austrian economics).

          NOTE * The oligarchs

          1. TheCatSaid

            Thanks–the ordoliberalism concept helps explain the attitudes in Germany. I’d never heard of it before:

            “The answers are rooted in German intellectual history, especially in ordoliberalism. This is an offshoot of classical liberalism that sprouted during the Nazi period, when dissidents around Walter Eucken, an economist in Freiburg, dreamed of a better economic system. They reacted against the planned economies of Nazi Germany and the Soviet Union. But they also rejected both pure laissez-faire and Keynesian demand management.

            The result was a school that was close both in personal contacts and in its content to the Austrian school associated with Friedrich Hayek. The two shared a view that deficit spending for demand management was foolish. Ordoliberalism differed, however, in believing that capitalism requires a strong government to create a framework of rules which provide the order (ordo in Latin) that free markets need to function most efficiently.

            From the original ordoliberals sprang one big idea for state intervention when cartels dominated the economy: a muscular antitrust policy. A second was a strict monetary policy that focused rigidly and exclusively on price stability. A third was the enforcement of Haftung, which means not just liability but also responsibility. Germany has tougher insolvency laws than America or Britain, for instance.”

      2. Norb

        Thanks for the post Clive. As one of the “laypeople”, I look forward to your contributions to NC. Your work and comments are always informative. Also, you have a fine sense of humor which helps immensely in these troubling times.

  5. Doug

    Thank you Clive!

    I have a two part question.

    First, what happens if Greek Merchants and non-Greek Cardholders (or, perhaps better said, Cardholders who have non-Greek Card Issuers) use Dollars and/or Euros (and here there’s an assumption that the EPoS would mostly/always have that option already built in and the system as whole would too)?

    Second, what happens if this gets extended to Cardholders with Greek Card Issuers — for some designated period of time during which the new drachma or cryptocurrency adjustments are made to the entire system?

    1. Clive

      Good questions. Actually, what you’re suggesting would kind-a happen in reality if Greece re-drachma-ised. As the card payments system would not initially have any ability to transact in drachma (and this would only emerge slowly, I’d argue very slowly, over a finite period of time) then:

      1) Greek Merchants would have their bank accounts forcibly re-denominated into drachma. They would be expected (depending on how the re-drachma-isation legislation was drafted and enacted) to adopt the drachma exclusively because that was now the sovereign currency of Greece
      2) All (initially) card payments would continue to be transacted in euros because nothing in the card payments system had been changed
      3) Greek Merchants would therefore have to mark up prices in drachma, but — for each and every card transaction — key in the correct equivalent in euros and agree a “euro price” with the Cardholder. Obviously each transaction the Merchant and the Cardholder completes is now much more complicated because both the Merchant and the Cardholder must agree that the exchange rate between the euro and the drachma is acceptable to both parties.
      4) Assuming both the Merchant and the Cardholder agree a price in euros for the transaction, the Card Issuer would send to the Merchant Services Provider the agreed amount of euros.
      5) The Merchant Services Provider would then send the euros to the Merchant’s bank account.
      6) The Merchant’s bank would convert the euros to drachma at the prevailing rate and credit the Merchant’s bank account in drachma.

      What’s the problem, then ? Well, this would expose the Merchant to currency risk. If they’d struck a euro price equivalent for the transaction with the Cardholder, they’d have to be sure that the drachmas they’d eventually receive as the output to stages 1) to 6) above didn’t leave them with a currency conversion loss. They’d have no way of knowing whether this had or hadn’t happened until several days, possibly several weeks later when they got their bank statement showing the results of the transaction and the conversion rate applied by their bank.

      Sometimes they’d “win” — they’d get more drachma than they’d expected. Sometimes though they’d “loose” and not get as many drachma as they’d hoped. In order to protect their profit margin, the Merchant would have to agree with the Cardholder a euro/drachma conversion rate which had a fairly wide spread. Not impossible, but clearly this adds a layer of complexity to each card transaction which a Greek Merchant has process.

      1. bh2

        “Well, this would expose the Merchant to currency risk.”

        Merchants world-wide already have currency risk whenever they contract for international trade. Moreover, central banks commonly run pegs on their currency to minimize this risk.

        In Colombia, for example, the USD has appreciated by 30% in the past year. However, the Colombian economy COL (pesos) withdrawn from a local ATM bears all currency risk, such as it is.

        Since currencies don’t gyrate wildly on a daily basis, it’s not much of a problem for either the merchant or the customer for spot purchases. Nor would it be for Greeks selling tourism.

        Of all possible objections to Greece adopting another currency (its own or someone else’s), this is the least challenging. Indeed, it’s a bit of a red herring.

        And if Greece were to simply adopt the currency of another major nation (e.g. USD), they would sustain no greater currency risk than they do now using Euros.

        1. Clive

          Saying that some Merchants choose to participate in commercial dealings with customers who want to transact in a different currency is one thing. Turning, without option unless they no longer want to accept card payments, every Merchant in Greece who does want to take a card payment (from either domestic customers or overseas visitors) into a currency speculator is quite another thing entirely.

          1. washunate

            I don’t see where you are going with that, though? Any person or organization holding national currency units (or owning other organizations holding national currency units) is exposed to currency risk. That’s what currency risk is. The ‘price’ of a currency is by definition relational. Currency has no substantive, independent value. It is priced in other currencies. A euro is worth 1.2 francs. Or 1.05 francs. Or something. It’s just numbers.

            To think that is not the case is what is dangerous, what can leave you vulnerable.

            In a huge domestic economy that has relatively little international trade (ahem, the US), we can (mostly) ignore currency risk, at least over shorter time frames. But in a smaller nation or a nation with larger import and export activity relative to the domestic economy, this becomes an ongoing material concern.

      2. washunate

        Clive, I’ve been thinking about this some, and I don’t follow why this is such a big deal in terms of the existential nature of the system*. Of course details matter and I heartily agree we should critically analyze all policy proposals for their operational innards. It just seems to me on this particular front you actually described how it would work if push comes to shove.

        Drachma prices would go up.

        The payments systems wouldn’t totally collapse. Merchants wouldn’t completely go out of business. It would just cost more drachma to buy stuff. Which is kinda the point anyway, right? The entire reason for abandoning the fixed exchange rate of the euro would be to depreciate a national Greek currency relative to the euro specifically and the dollar/pound/franc/yen/ruble/lira/rupee/yuan world more generally.

        This could actually be a great tourist marketing gimmick. Pay in dollars, receive a discount! Of course the foreigner discount would be applied to a higher base price. But you only know that if you can read the Greek fine print! Dual price systems are quite common in tourist areas for market segmentation to distinguish between those able to pay higher prices (mostly the foreigners) and those unable to (mostly the locals). I remember the story of a rather German American visiting a friend in Thailand. Simply by trying to say the number in Thai rather than English or German, he got the local price. The merchant was apologetic for initially charging him the tourist rate. All sorts of venues charge extra fees for online purchases that are not assessed on locals who can appear in person. Just try buying a sporting event or concert online. Even the Germans tack on a little postal fee when you order train tickets from Deutsche Bahn or add a reservation fee to set up your Neuschwanstein castle visit in advance.

        Think of all the passes to tourist attractions the Greeks can sell in advance for a, uh, more bigger nominal fee. Anyone who doesn’t want to pay simply waits in line in country for the local price. Indeed, there’s a merchant opportunity in itself. I’m sure food and souvenir vendors can be handily arranged near the longer queues. Plus all the tours and expeditions and adventures for sale to tourists once they’ve arrived.

        Unless you are suggesting massive day to day foreign exchange volatility with the drachma, a standard markup of, say, 20% would easily cover the currency risk. If there are unique situations where a merchant may not see payment for an extended period, you use a higher markup.

        *The social consequences of currency devaluation are of course a separate but important issue.

  6. Ruben

    It’s not rocket science. It might take time and pain and disorder but it will eventually be done. They would mostly lose the current tourism season but they would be back in force next year.

  7. Diego Méndez

    The Greek payment market is worth hundred million dollars. Why would any company not be interested on it? Why would capitalism fail so abruptly that a service with huge demand in a relatively big market isn’t provided by companies? They would only need some weeks to figure out how and behave accordingly.

    Remember, Clive: companies do not make gifts, but neither do they reject money. Of course, there would be disruption for several weeks. Nothing that couldn’t be overcome. And tourists would keep on paying with euros and dollars, much as in every non-euro, non-dollar country with a big tourism industry.

    1. Jose

      Introducing new currencies may be complicated but it can definitely be done – and done fast and efficiently, the parties involved willing.

      One good example is the 1993 currency (and country) split between the Czech Republic and Slovakia.

      The split, together with strict border controls, was announced on February 2. A state-owned commercial bank glued stamps on 150 million banknotes. The exchange for notes stamped by Czech or Slovak stamps, at a 1:1 rate, started on February 8 and was completed in four days. Later in the year the stamped notes were replaced by new ones.

      The whole process went ahead smoothly.

      If Grexit proceeds without a hostile attitude by the EU powers there’s no reason for it not to be a success – the Czech/Slovak split provides strong evidence for that.

      1. Lambert Strether

        I responded to your point on the Czech precedent on the other Greek thread. Here, please show (a) that this is legal for the Euro (as opposed to the national currency of the former Czechoslavia) and (b) that the Greek government has the organizational capacity*; presumably they would also have had to be planning, in secret, for months. (The secrecy seems implausible to me; so far as I can tell, the Greek government leaks like a sieve.)

        “If Grexit proceeds without a hostile attitude by the EU powers.” I take it, then, you agree with Yves that Syriza’s negotiating tactics have been, at a minimum, utterly incompetent?

        NOTE * I had missed the requirement for strict border controls. If this is indeed a requirement, then there’s no precedent in Czechoslovia for Greece, because Czechoslovia is landlocked. Greece, on the other hand, has a complex coastline on the Aegean, ideal for smuggling. So the Czech precedent is no go, on your assumptions.

      2. sid_finster

        Credit cards and payment systems were pretty exotic in the former Czechoslovakia in 1993.

        Hence the process was much simpler.

    1. Jim Haygood

      ‘Cash societies are very susceptible to regressing to a black market economy with the predictable implications for a government’s ability to secure tax receipts.’

      Sounds good to me. Let’s roll!

  8. Brooklin Bridge

    The elegance of Clive’s explanation carries it’s own problem: It seems too simple, until you start playing with it and trying to get your way. For instance, a new form of currency should (in theory – theory is always easy until you poke it) be simply another variable and as such be almost transparent to the EPoS terminal which just suddenly sees an additional entry in the list of currencies supported by that particular EPoS terminal (and all others in Greece) and dutifully presents it on the screen to the card holder as the default. The idea is that somewhere, someone, plugs in a list of values required to be unbreakably associated with this new currency within the card system and which allow conversion to other currencies by simple math and thus permit all the steps described above to take place seamlessly in the blink of an eye. Even a compound currency (might) be handled if the system was robust enough to handle multiple types of currency of which this particular compound was one. And that line of “software problem” thinking suggests even more elegant solutions to support not yet unimagined currency types.

    After all, currencies even today go up and down relative to each other and yet the card system keeps working smoothly and the card issuer knows exactly how much to remove from a given account to pay for n units of a foreign currency (representing say a wonderful meal by the sea side) on a given day and time.

    If I’m not mistaken, Clive gives the reason this description of simple variables wouldn’t work (in a 300 dollar computer dressed up to look like an EPoS terminal) in the fact that the regulators have made sure that the card payment system remains fragmented so that no one entity within can start monopolizing their particular segment and thus ruining it fro everyone by unreasonable rent extraction. Number 4 above, for instance; the networks don’t get to define a currency (which would provide great flexibility – but at great potential cost of abuse). Another reason, of course, is security. I imagine that “firmware” is used to define a given currency and what can be done with it to help prevent the simpler forms of hacking. And so on.

    Any single mistake (or code error, or intentional misuse) in a given currency area (country) would be multiplied by thousands or hundreds of thousand of times during a day or until the problem was recognized and this could become incredibly costly in a relative blink of the eye. So these ubiquitous machines are also part of a “mission critical” system.

    So on the one hand you want to design a system that is flexible enough to be profitable without requiring major overhauls all the time and which is capable of supporting -a certain amount of – new features and upgrades, but ridged enough to prevent cheating and abuse particularly from those within who probably don’t trust each other, at the end of the day, much further than they can throw each other. Ha! Amazing it works at all.

    1. OpenThePodBayDoorsHAL

      Please let’s not imagine that dino-money systems like credit cards, (invented circa 1960, where, for example, your secret number is printed on the front of the card, which you then hand to the valet parking guy and cross your fingers that he does not swipe it for his own purposes) are the only possible solution. Anybody ever heard of “apps”? They run on mobile phones, which everyone seem to have these days. MIT says they are more secure than your Visa card:

      Which isn’t saying much, sprawling legacy payment systems must run “perimeter defense” that excludes every bad actor since, once in, they can do whatever they want, they are “pull” systems. But digital currencies are “push” systems, one-time, exact amount digital cash.

      These so-called “apps” are very easy to distribute and use, you could even, for example, distribute one so people needing a ride somewhere would not need to find a taxi, that would save time, money, and be more enjoyable to boot.

      But back to money. Since we have a distribution mechanism (the phone) that instantly substitutes for a card and terminal network, and they’re more secure, what remains to be done? Issue a currency that people want to hold, I don’t know, maybe 100% backed by direct obligations from the largest gold vault providers in the world? (howls of protest that gold is no good, it’s a barbarous relic, blah, blah). In order to adopt, a person gets the app. They rock up to someone they want to exchange with, they text the person a link, now they have the app too, and can send to the next person down the line. And so on. Full AML and KYC, 2 1/2 years of work, and we’re almost ready for production.

  9. craazyman

    aren’t you overcomplicating this clive?

    they could issue drachma currency, which Greeks can use to pay taxes (if anybody actually pays is another story) and keep the euro payment system for all the new Porsches and Leica cameras they’ll be buying.

    people can use either credit cards in euros or cash in drachmas. they’d be convertible into each other so they’d both work.

    all this tech stuff is MEGO material. it like having Budweiser and Bud-lite in your fridge. You can drink Budweiser or you can drink Bud-lite. it’s up to you. if somebody borrows a few Budwisers and pays you back in Bud lite, well, life not perfect but it’s better than nothing

    1. Clive

      See my earlier comment of how dual running of a sovereign currency (e.g. a new drachma) and a parallel currency (e.g. the euro) imposes a currency risk on the Merchant.

      If I were to accept the craazyman booking to stay a Clive’s Rustic Hampshire B&B and Fine Cake Cafe (not, suffice to say, a booking I’d accept with alacrity) you could, if you were suitably insistent, insist on not trying to get your head around all this pounds and pence nonsense but to settle your bill, including no doubt a not insubstantial amount for some watery beverage you continue to call “beer” in cash dollars. There is nothing to stop either you, me (or the Greeks) doing likewise.

      But even though the USD / sterling rate is one of the most stable and widely traded currency pairs, I would have to impose a spread to allow for currency risk. And a handling fee because of the extra work it would entail for me to manage the additional currency. If, as I suspect, you eventually ran out of cash dollars, I’d have to take a card payment in sterling. If your vacation extended to Greece, they’d have to take card payments in euros and even if you wanted to express solidarity for the Greeks by paying in drachma, tough luck mate, you’re paying in euros and that’s that.

      1. bh2

        With all due respect, Clive, convenience does not trump necessity. And the necessity is that Greeks continue to earn money to keep the lights on.

        It may not be as convenient to pay in cash and compute exchange rates, and merchants accepting cash payment generally do hedge their currency risk by offering a lower rate (but better than airport currency conversion services).

        That said, if your formerly EU300-a-night room on a Greek island is now priced at EU70 a night (perhaps now with free breakfast), are you really going to bitch if the merchant converts at a lower than bank rate so the real price to you is EU80? Seriously?

        1. Yves Smith Post author

          The hotel goes out of business long before it would get to offering rooms at 70 euros a night. In case you missed it, tourists are already canceling trips to Greece like crazy.

      2. craazyman

        It wouldn’t work across national borders probably, that’s quite true, but it would inside Greece.

        If a plumber, electrician, beauty salon operator, cafe owner, local baker and bike shop owner are all sitting around at home for lack of money, a printed currency would give them a medium of exchange and they could cooperate commercially.

        The plumber could buy a bike and go to a cafe, which could then pay the electrician to fix its lights, who could in turn go to the bakery for cakes allowing the sales girl to go the salon, which in turn could call the plumber to come fix the bathroom

        It could work pretty easily. Then if somebody saves up some drachmas they could trade them in for euro and buy the Porsche and Leica camera in euros using a credit card. Everything paid for in drachmas has to be cash in the wallet stuff, The conversion to euros would have to occur at a bank, but you wouldn’t even need conversion. People could use them side by side.

        Better than everybody sitting around at home by themselves.

        1. TheCatSaid

          Like a basic LETS (local currency) system?
          There could be different systems in different cities or regions.
          People will find ways to function.

        2. Lambert Strether

          “It wouldn’t work across national borders.”

          1) Tourism is 18% of GDP

          2) Petroleum needs to be imported and exported.

          3) Ditto pharmaceuticals.

          (I know Varoufakis claims to have both stockpiled, but that’s not relevant to your point.)

          1. craazyman

            if they had drachmas to spend on the small stuff they’d have more euros laying around for the big stuff.

            Also, tourists can always bring in euros! drachma notes don’t crowd out euros. Tourists are more likely to come to a place where society is functioning and that’s even more euros for Greeks.

            more drachmas (up to a point anyway) means more euros, more petroleum, more drugs.

            don’t confuse yourself with technical complexity! this is so simple it’s ridiculous.

            1. Nathan Tankus

              Yes I’m sure tourists are just rushing in to a society with no functioning international payments systems, making sure they have all the cash in the world. thousands of trips have already been canceled. Let’s be real, no functioning system for getting Tourists physical drachma combined with having to bring your own euros for all your expected expenditures in the middle of a social crisis with supply chains collapsing (ie all the stuff you need to live when you’re visiting too) means basically no tourism industry.

              Get serious.

              1. craazyman

                you guys are just discrediting yourselves as narrow minded techocrats

                get an imagination already

                it’s not drachma OR euro. It’s only selective printing of paper drachmas backed by use as tax payments to cultivate local microeconomies to get the folks off the couch and off the depressants and back working with each other

                money is not wealth, cooperation in a structured and reliable way is wealth. if that is cultivated, then wealth is created. wealth can be denominated in drachmas or in euros.

                printed limited supply of drachmas is like training wheels for a bike or maybe like crutches for recovering patient until they get fully back on their feet.

                I’m sorry to be rude but this is getting boring at this point. If you guys don’t get it by now you never will. There’s ALREAY examples of local currencies making life a bit better for people. It’s not the permanent solution but it’s a step in that direction

                1. Clive

                  Like it or not, card payments are the backbone of a tourist industry. Vacationers do not like taking their entire vacation budget in cash. Many can’t actually afford the vacation out of ready funds and rely on credit cards to pay for it. And as I pointed out, car rental without a credit card being presented as the pre-auth forces the car rental company to demand a huge cash deposit.

                  Tourism is an important part of the Greek economy. Therefore the continued ability of Greek tourist businesses to handle card payments is important too. Wishy-washy notions about local currencies is all very well but it is a long way from being practical for most tourists, their banks who sell them their holiday money and the businesses who operate in the tourist industry. I think the phrase you used a little while ago was very apt. You called it internet save the whale hand waving.

                  1. Kurt Sperry

                    Would issuing alternative parallel currency(ies) necessarily mean existing card transaction systems denominated in euro wouldn’t work exactly as they do now? It’s not obvious to me why, if so. Let tourists and anyone else wanting to do their card transactions in euro, and use alternative means of payment outside the card system for any non-card transactions where both parties agree to. Basically, keep what works exactly as it is, and add alternatives for those choosing to use them. If the alternative payment systems are too complex or burdensome for the merchants, they can obviously choose to turn customers away wishing to pay them in alternative currency, and the customer can find another merchant willing to transact with them. One suspects those merchants may then reconsider.

                  2. Ruben

                    Have you been a tourist in Greece?
                    You don’t need to rent a car nor use a card.
                    Public transport is nice in Athens (as in much of Europe) and not much needed in the islands, taxis are everywhere, driven by former engineers, business managers, store owners, you cannot find more educated taxi drivers in any other country. I truly believe the tourist that rent a car is an exception,
                    Regarding the no need to use a card, a few 500, 200, 100 euro notes is all you need to pay all your expenses, including hotel.
                    Last time I was in Greece I only used my debit card to pay for the hotel although they asked whether I wanted to pay in cash.
                    I loved it there, it is the country where all streets are carrying mathematical symbols!

                    1. TheCatSaid

                      The local knowledge perspective is crucial. It’s too easy to make false assumptions using conventional logic (e.g., important tourism sector = card payments are required, which you’ve shown is not accurate).

                      Not all tourists or tourism looks the same. To me, Greece looks like a particularly attractive destination at this point in time.

                2. Ruben

                  “money is not wealth, cooperation in a structured and reliable way is wealth. if that is cultivated, then wealth is created.”

                  I cannot thank you enough for this insight that you have regaled us with a few months back and that you repeat here. My comrades and I are are working out its implications in a number of fields.

                  1. TheCatSaid

                    I too am grateful for that comment. I continue to learn about the possibilities via Integral Accounting (which M-CAM is now teaching as part of several MBA programs in the USA).

                3. Lambert Strether

                  Craazy, I’d love to believe you. But this is just a story. Diptherio mentioned the TEMS, IIRC, a local currency, after I finally got some material on the coops (not from Syriza cheerleaders, I might add). I put in Water Cooler. If you want to argue the Greek government is going to support TEMS with paper currency, by all means do. But you don’t.

                  If you want a blog of pleasant fictions, feel free to find one. NC is not that blog.

      3. craazyboy

        “some watery beverage you continue to call “beer””

        craazyman is more of a red wine guy and may not even be aware that you can get a nice chewy Russian Imperial Stout from many micro breweries all around the US.

        1. craazyman

          can you believe these guys? they don’t have a clue about reality.

          I like Budweiser or even Bud lite – cold and crisp. And Lipton tea!

          I don’t know what they drink over there. it looks like molasses to me. Yuck.

          Enough of Greece. You’d love this. This is cool. This dude is one off my heroes. Clearly he went to U. Magonia. A very famous alumni.


  10. JohnB

    In the context of parallel currencies:
    I understand that the wider financial system is decentralized/fragmented/complex and takes time to transition, but what is wrong with the idea of a centralized/monolithic system controlled by the Greek government, taking its place during the transition period?

    I know that regulations and fraud control etc. need to be considered, but (even though I’ve brought this up a few times in comments and have gotten replies from Yves and yourself, which I’m thankful for), I’m still not entirely clear on the practical difficulties of that as a stopgap system.

    If you implement it as a centralized cashless system, which people utilize through Internet access e.g. on their mobile phone (appropriately encrypted and with two-stage verification), I don’t see why you couldn’t just completely excise/cut-out the complexity of the abovementioned systems; it should not be hard to eliminate fraud opportunities, or to fix lack of access, if implemented correctly,

    I know this still takes time to setup, but you have monolithic control over it, which would allow a lot of covert development in the run-up to introduction, and should be able to implement it relatively quickly domestically – though international integration would likely still suffer from a lot of delays.

    1. Yves Smith Post author

      1. Greece still has low mobile phone penetration

      2 Putting the front end on phones solves NONE of the back end problems.

      3. You can’t “centralize”. Please read the post again. The card systems are fragmented. If Greece wants tourists to be able to buy things using credit and debit cards and pull cash out of ATMs, it has to interact with these decentralized systems. The rest of the world is not going to redo its entire operations for the sake of the Greek tourist industry.

  11. jabre


    I appreciate that you have taken time to explain the system. But, the issues you describe seem relatively simple to remedy.

    ‘ that would not change the configuration of those thousands, more likely hundreds of thousands, of EPoS terminals installed in Greece’
    Why not? From a software perspective this is *trivial*. The merchant services provider should have list of EPoS terminal identification numbers for location. Simply add a lookup table at the processing step that knows which terminals now transact in drachmas. From a programming perspective this is a link to an existing database and one line of code.

    ‘software built into the EPoS terminal itself’
    EPoS terminals by definition are connected. They are also fairly monolithic in implementation because of a common function. Because of this, minor code updates, like representation of currency type would be trivial to push out to the system to update. Again, at the terminal the only thing that needs to change is Euro ==> Drachma. Transactional processing is handled separately as you point out.

    ‘ each of these parties are entirely different and run different sub-systems which interface to each other’
    Again, this simplifies the problems as the systems interface remains intact. Modifications are restricted to where translational changes are required.

    I was wondering about the complexity of the system. From a technical perspective, what you’ve described, from my perspective, now seems trivial to accommodate into the Drachma.

    1. flora

      this is a link to an existing database

      This assumes, at a minimum, a database that doesn’t yet exist.

    2. Clive

      The first step in reconfiguring the EPoS terminals is to define the standard for how the card payments system needs to handle drachma. But there is no standard ! It has not been defined. You cannot, in software development, launch yourself into “build” without going through and completing “design”.

      And please do review the material I have provided in the article again. Changing the EPoS terminals in their own does nothing. Why should, say, Card Issuer Wells Fargo, take huge risks with its customers, The Cardholders, to whom it has issued cards to, in implementing changes to its systems which remit money to the Merchant Services Providers without a big effort in ensuring bug-free development and testing ? And like the EPoS terminal changes, it can’t even begin to start without an agreed specification for how the card payments system should handle drachma.

    3. BillC

      jabre, forgive me if I’m wrong … sounds like you know software development, but perhaps not deployment and change management in large distributed systems, and probably not in large financial institutions.

      Even the most trivial software change has to go through rigorous, multilayered, and time-consuming testing and change control (it’s often the trivial change that bites you because nobody fears it and digs deeper). Then “the” merchant services provider (actually many, headquartered in many different places), not to mention the various card networks that do transaction approval, and all the card-issuing banks, have to roll out similar logically-equivalent (but not always identical) “trivial” database changes on an agreed and compatible schedule or transactions will fail.

      Based on my former IT experience in one TBTF bank (i.e., I’m probably a starry-eyed idealist compared to Clive), I can’t imagine all that being done in less than many weeks at best — about the length of a Greek summer tourist season. And that, only if it immediately becomes the #1 IT priority for every impacted party, all parties are strongly motivated to cooperate, and all can agree on a small steering team that can keep all those collaborating teams informed and coordinated.

      1. jabre

        BillC / Clive,

        Your points are well taken. I would not argue with your expertise in the assessment that rolling out such change is not something can be done overnight. But, these changes are not insurmountable. They are not *technically* challenging to the point of providing legitimacy to the argument that self-control and self-determination of a Greek currency are not reasonably achievable.

    4. Lambert Strether

      “From a software perspective this is *trivial*.”

      tl;dr: “It’s a simple matter of programming.”

      Please be serious. Clive’s entire post is devoted to showing why the problem is not trivial. Do consider reading it.

  12. Adam Levitin

    This is an excellent post, but I think it’s observations are mitigated by the degree to which Greece remains a cash economy, both because of the cost to merchants of accepting electronic payments, and perhaps most importantly to facilitate tax evasion. Obviously this varies across the retail sector; on-line merchants have to take electronic payments, but most restaurants in Greece, for example, are cash-only operations.

  13. Tiger

    I’m sorry but I’m still not buying any of this. When there’s a will there’s a way. Period. Mobilize the greek army along the border. Then stamp euro cash in a hard to impersonate way to turn them into drachma. And count on the people to have solidarity, even in places where cash is typically unused. And, for many things, just make them free. Just issue a decree and implore common courtesy. In the meantime populate bitcoin infrastructure. If people are not courteous with each other at this point, if Greeks don’t care about each other, they don’t deserve to be a country in the first place, right? So if you’re gonna survive as a sovereign, do what you gotta do and be brotherly until bitcoin systems are in place. They’ve got all the resources they need. Falling into the technical details that Clive discussed is precisely giving the banking system the importance that it shouldn’t have if we lived off of it and either in something better or something more basic like hmmmm cash .

  14. Carla

    “so much of the financial system’s complexity is transparent to the end user.”

    Clive, did you mean “so much of the financial system’s complexity is INVISIBLE to the end user” ?

    Or, “so much of the financial system’s complexity is HIDDEN from the end user” ?

    1. Clive

      My view tends towards the latter — hidden, due to either intent or neglect by agencies which define the curricula in schools, media who you would think wish to educate their audiences as well as merely keeping them entertained and providers of financial services for whom it would cost little or nothing to include amongst their marketing guff some broad technicalities along the lines of “this is what we do and this is why we do it that way”.

      Okay, this might not be the most interesting of topics. But it is important as it affects our daily lives to a greater or lesser degree. So why don’t the people with the information put it out there, especially nowadays when the dissemination of information has never been so easy ? The fact that we have to rely on a blog run on a part time basis by a woman and her cats, some bloke in a place called Maine which I thought was only the fictional home of a TV character played by Angela Lansbury lived and a few other ne’er-do-wells to get the details does make me wonder…

      1. VietnamVet

        Thanks for the financial system details. I agree that the complexities of the modern world are hidden on purpose from the laypersons. This was true in my working life. I was convinced that doing a job was learning the jargon. Plus figuring out how do something when that skill is how another person made their living. My working life had to been for some greater good. Instead, in my old age, the restart of the cold war with nuclear armed Russia, climate change and the pillaging of Greece, makes clear that societal wellbeing is the last thing on the minds of our current politicians, technocrats or ruling oligarchs.

  15. ennui

    I don’t understand the obsession with how difficult it would be to switch currencies for an electronic payments system. I mean, sure it’s an interesting technical problem if you enjoy that sort of thing, but how is it actually relevant to the situation in Greece?

    If/when Greece starts issuing it’s own scrip, it will be on a cash basis at first. The fact that it may make it more awkward to rent a car or buy a train ticket is not a serious objection. Will there be economic costs? Absolutely. But issuing paper money is the easiest thing in the world. Will there be theft? Absolutely. But since drachmas will only be good for buying things in greece and paying your taxes anything stolen will just be spent immediately… which is good. Will euros notes still circulate? Absolutely. So, what?

    And then, issuing drachmas will make it hugely easier to reform the Greek tax system, since being able to pay your taxes in funny money will solve many compliance problems.

    The much harder problem is how to restart the Greek commercial banking system and this will have to happen regardless of an exit because the ECB has destroyed the banking system as a functioning unit of the Greek economy. Solvency is a technical issue, without a flood of cash, the banking system will exist only in a zombie state… which is yet another argument for the drachma.

    1. Yves Smith Post author

      “Awkward”? I wouldn’t go ANYWHERE where I had to put down a huge cash deposit to rent a car. It’s not just the hassle and risk of carrying that much in funds. It’s the risk you never get the money back! Credit card networks have rules and they also do so much business with any car lessor that they have leverage. If you think they’ve been unfair in how they’ve charged you, you can object and get it reversed. Chargebacks are THE reason to use credit cards, IMHO. They are a huge consumer protection.

      One person dealing with a car lessor in a foreign county? You’d be lucky to get 80% of your deposit back.

      Tourists can get a holiday experience similar to Greece with way less hassle in Croatia or Turkey.

      1. Ruben

        Why the obsession with renting a car? Is that an American thing? There are public transport systems, taxis, walking, ferries to the islands, it is vacation time, leisure. A major, historical struggle of a people against a budding super state questioned for renting a car?

  16. Legendary bbigfoot

    Great technical explainer outlining the challenges to the system.

    However, I thought the key fundamental issue in Greece was the existence of a cash based black to grey market economy that facilitated tax avoidance, poor control over social welfare outlays and an environment conducive to criminal activities preferably conducted in cash.

    Articles I have read in the regular media note that in the islands especially there is no infrastructure to support cards. Might it be that Greece is ready to go back to the paper days? Carbon imprints settled at banks, for example, paper traveler’s checks, and wire transfers?

    1. TheCatSaid

      “existence of a cash based black to grey market economy” –seems like that will be on the increase, from a purely pragmatic point of view–local actions that don’t require any government action (whether Greek, EU or other).

      BBC predicts “No” vote has prevailed, 20% of votes counted:

  17. Oguk

    This kind of post is what makes NC so valuable. Clive, Yves, and Lambert are right on to emphasize the importance of the daily details, and why they affect political struggle. I have enough familiarity with payment systems, from the merchant side, to confirm the complexity and systemic (and legal) nature of these systems. The posts on operational capacity as it relates to executing a currency change are likewise germane. As Lambert said somewhere above, the Left waxes poetic about what should be done, but hasn’t a clue about – and isn’t interested in – the details of how to do it.

  18. normansdog

    I think Clive is over egging the technical issues, updating software is not a big issue nowdays even on primitive systems like payment devices. Getting agreement on the updates will also be easy as these companies want to continue making money by handling transactions and until they update the software every payment system in Greece is worthless.
    Finaly, I spent many happy hollidays in Jamaica where no one was in any way perturbed by having to trade dollar travellers cheques on the street with dodgy looking Jamaican finincial-engineers in order to get very good rates for the holiday beers. The same model works in Greece.

    1. Yves Smith Post author

      The cancellations of bookings in Greece say that you are a decided minority. Just about no one uses travelers’ checks now.

      1. Normansdog

        Tourist bookings Are down because of the uncertainty, that will go away. Also, people don’t use vinyl records or analogue telephones anymore, not because they don’t work , just because no one makes them anymore. Old solutions will work here, they always did in the past. Don’t get hung up on technology.

    2. flora

      Getting agreement on the updates will also be easy …

      Assumes a new drachma already has settled currency exchange rates (it does not) and international settlement standards (it does not). Assumes that setting these standards isn’t difficult (it is). It should go without saying, but apparently doesn’t, that the upstream govt treasuries, international banks and finance would first need to agree on those points, and that this can be as much a political as a financial question.
      Complex as the card payment system itself is, the international political/financial system it works under is even more complex.

      Deus ex machina is a handy plot device in fiction, not so much in life.

  19. MaroonBulldog

    The Greek voters voting “OXI” do not believe themselves to be voting to abandon the euro, revert to the drachma, and accept the additional damage to their economy that would follow as a consequence of the costs and delays described in Clive’s post. SYRIZA does not believe or accept that “OXI” means no to the euro, either. No one in Greece seeks this outcome.

    If Greece is forced off the euro, then the events anticipated by Clive will surely come to pass, and that will be a further indignity inflicted upon Greek people by others in Europe.

    The issue is, how quickly will the technological changes be implemented if this all does come to pass? My impression is, they will take longer to implement than most of the commenters here seem to expect. And why shouldn’t they take longer. Because prolonging the process is sadistic? Forcing Greece off the euro would be sadistic to begin with.

  20. MarkJ

    It seems that much like the American medical services system like the card services system has been especially set up to serve a rentier function gleaning two to three percent of every sale into the pockets of financiers.

    As the purchase amount grows the amount taken by the third party financial transaction system grows to a level that becomes burdensome for the purchaser and seller. Also, the small purchase retailer is forced with the fees of providing a card system for those customers that use them and marks up all merchandise to a level that includes the card system cost overhead just in case the system is used.

    What to do? A two tiered payment system should not be unthinkable. First of all, cash is defined as legal tender, whereas the card processing system transactions are not. Cryptocurrency has some chance to systemically augment the current card payment system using blockchain technology and has garnered the attention of IBM.

    The rest of the EU financier herd would have to follow Greece’s lead on this issue or risk losing a lot of future revenue.

  21. Deep Thought

    Thanks very much for this post. It was really well explained. As always in life, the devil is in the details.

  22. Corey

    Pass a law requiring taxes be paid in the new drachma, allow it float freely, fire up the printing presses, and wait for the problem to take care of itself. Maybe top-down “solutions” ignore the inherent ability of people to cope, innovate, and work out their own fixes to problems.

    I live in a region where two different national currencies are accepted side-by-side by all merchants, even street vendors. No one seems to find it particularly difficult or burdensome. There are exchange houses around to provide cash conversion services. Banks accept deposits in both. Taxes are due in the national currency.

    Yes, Greece will have to become a cash-based society for a while, but so what? That won’t deter the tourists forever, and eventually the electronic payments systems will get converted over.

    1. Nathan Tankus

      is your hand tired from all that handwaving?

      it’s amazing that people think a system that’s well settled and simply reproduced is the same as fast major systemic change.

      almost any convoluted system can be implemented given enough resources and time. Greece has very little of either.

  23. gardener1

    I’m late to this conversation and haven’t read all of the comments yet, but insofar as issuing and electronic crypto currency drachma goes-

    Ecuador has already legalized their own electronic currency to be used as payment within the country. To the best of my knowledge the system is not up and running yet, but the framework for use has been created.

    Why can’t the Greeks do the exact same thing for domestic purposes?

    1. Yves Smith Post author

      Um, did you read the post? A domestic only currency cannot be used by tourists. If Greece wants to have a tourist industry, which is ~18% of the economy it needs to be mindful of the issues Clive has described.

  24. Armchair Revolutionary

    While I found the read very interesting, I am going to disagree with the conclusions.

    First, for card machines and merchant services, this will be material, but negligble. Almost all merchant service providers are prepared for multiple currencies. This will be simply changing the currency on the account. For the card readers, this will be a configuration on the machine or at the merchant account. Merchant Service Providers will provide instructions via web for making the configuration change if any is required. So the Merchant Service Providers will encounter a spike in support calls; much of which will be directed to the web.

    The ISO code will be a non-issue. The new Drachma code will be decided quickly. There will be no foot dragging on this.

    The area where there could be a hold up will be the banks. For many banks this will be a non-issue as well. Many will already be prepared for handling accounts in multiple currencies. However, there will certainly be some where this requires some code changes across multiple systems. Even these banks will most likely have written processes for adding a new currency.

    So my conclusion is that this is practically a non-issue.

    1. Lambert Strether

      “This will be simply changing the currency on the account.” There is no currency. Reread the post.

      “The ISO code will be a non-issue. The new Drachma code will be decided quickly. There will be no foot dragging on this.” Maybe so, though evidence would be a lot more persuasive than mere assertion. From my ISO experience, no. Can you point to some sort of expedited process?

      1. Armchair Revolutionary

        “There is no currency.” The account at the merchant service provider will have a currency code associated with it.

        No I cannot point to an expedited process, but I am confident this will not be a drawn out process. Most likely, the banks will make the call and tell ISO what the code is. It would not surprise me if this discussion were already underway. It is a pretty simple question; use the old GKD or create a new one?

        1. Yves Smith Post author

          Swift, the international payments network, will not accept drachma transactions with no ISO code. And let me remind you of an earlier comment from Clive:

          No. Currency issuance, payment systems management and transaction processing isn’t amenable to a “best endeavours” approach. If you’re maybe North Korea, you can run yourself as a ring-fenced self-contained isolated entity and then perhaps not worry too much about interfacing with the rest of the world. But Greece doesn’t want to become reduced to a North Korea-like level of economic (dis-) functioning.

          Card issuers, individual banks and even whole countries can and have been cut off by the other participants in the world economic and financial system because they’ve not adhered to the applicable standards expected of their currency (e.g. paper currencies being so prone to forgery that they can’t be negotiated outside of the country of issue, card issuers having their cards not authorised at merchant terminals because they are not-to-current standard or wire transfers being un-routable because the bank of origin isn’t deemed trustworthy.)

          A case-study is the Vatican which ended up being a financial system pariah due to not being 100% compliant with prevailing security and fraud-and-loss control standards.

          Experimenting with crypto currencies and making-stuff-up-as-you-go-along is not going to cut it for Greece if it wants to remain in any way connected to the global financial system. While we could argue that this is unfair, that Greece has not been treated with any sort of consideration and it would be being kicked while it was down if it was subject to tough criteria in respect of what it was supposed to do in transitioning from the euro, any arguments which might be made by Greece that everyone should cut it a bit of slack would be made from a very weak negotiating position.

  25. H. Alexander Ivey

    Great post! Very clear and concise. I appreciate your work, something as clear as this is not something done just off the top of one’s head.

    But a quibble, alas. One I have complained about before (broken record). We need graphics – a schematic with colour lines, and arrows, and boxes and such. Is it not possible in this blog site? I guess I’ll have to do my homework…

    But, again, hat tip for your time sir!

  26. Jerry Denim

    Fantastic explainer. One of the most enlightening things I’ve read on Greece as opposed to the usual speculation and tea-leaf reading over hidden sub-texts, tactics, rumors and personalities. Nice work Clive!

    It’s looks as if this matter is becoming less hypothetical by the minute with the confounding “No” vote. Perhaps we shall know the real truth regarding the feasibility of last-minute, ad-hoc, sovereign currencies in a matter of weeks. Clive’s skepticism is pretty darn convincing, but I am still pulling for the plucky Greeks.

  27. Armchair Revolutionary

    Another reason that I would say this is a non-issue is to look at the business incentives.

    If you are a merchant service provider, are you going to tell your merchant customer that you cannot process their transactions? Every day that you are not capable is a likely day that they switch to a provider that can … even if it means keying in the credit card through a virtual terminal.

    If you are a card issuer, are you going to tell your customer, the card holder, that you cannot process their transactions? Can you imagine the ticked off customer who gets to Greece and discovers that his Visa does not work while all of his friends’ Visas are working? Do you think that card holder is going to consider changing banks?

    So the only consideration really seems to be will there be some kind of foot dragging on issuing a new code. If there is any question on using the old code, Greece could just name their currency differently; the Greek Royal or the Crown.

      1. Armchair Revolutionary

        So then the only issue we disagree about is the issuance of the ISO code. Apparently it is maintained by SIX Interbank Clearing, formerly known as Swiss Interbank Clearing AG. My guess, they either already know the code or have a plan for creating it in place. I have requested info from them on the time required. I do not expect a response.

        1. Lambert Strether

          So you’ve got nothing?

          UPDATE Yeah, I had to look and find some evidence, unlike Mr. Lazybones Handwaver, here. From the ISO site:

          Maintaining ISO 4217
          Periodically, amendments must be made to ISO 4217:2008 and these are managed by the Secretariat of the Maintenance Agency, in this case the SIX Interbank Clearing Ltd on behalf of the Swiss Association for Standardization, SNV.

          All standards have maintainers, and all the standards I know of and have participated in go through an ISO process that is standardized, as it would be; there’s a ginormous manual that explains the rules. In this case, the maintainer is “SIX Interbank Clearing Ltd on behalf of the Swiss Association for Standardization, SNV.” That doesn’t mean the amendment can be done at the whim of Six Interback; they manage the process, but there are committees and working groups that do the actual work. Now, you could argue — for example — that there’s going to be a fast track because reasons. Could be, though I’ve never heard of such a thing in the standards work that I do; the whole point of ISO is that the process is deliberative. So if you want to argue things are different, prove it.

          1. Armchair Revolutionary

            And you have nothing. “So if you want to argue things are different, prove it.” I can say the same to you.

            We are disagreeing on the time it would take for the new code to be established. Neither of us has any real evidence.

            Your evidence is that you have participated in standards organizations. I, too, have participated in standards organizations. In particular on a standard that took years to create the first version. But, this is not that. This is simply a code; a single entry in a table, not a full blown process.

            I have at least reached out to SIX to see if they can provide a time frame. If they provide an answer, then we will know. Instead, we are just spitting into the wind.

            1. Lambert Strether

              Well, I will await your promised evidence — in the form of a URL please, or with a named source — with great interest. In the meantime, here’s a little bit more about the ISO process:

              ISO standards represent, by an international consensus among experts in the technology concerned, the state of the art. To ensure that ISO standards retain this lead, they are reviewed at least every five years after their publication. The technical experts then decide whether the standard is still valid, or whether it should be withdrawn or updated. In some fields, the pace of development is such that when an ISO standard is published, the experts who developed it are already thinking about the next version!

              And here’s a sample of why technical experts are involved. I’m picking this one because readers will see how the actual ISO 4217 values are used to generate code:

              Java follows ISO 4217, and so it is pretty safe to add something like this – just follow the spec. My first inclination was to just make a Currency class with static fields: one for each currency. However, Jason Hunt’s implementation used a CultureInfo instance to represent the currency, and it got me to think about how this is already somewhat present in the BCL. Since the CultureInfo classes are built around an Int32 identifier known as the LCID, it seems reasonable to use this as the currency identifier as well. However, after some observation, this turns out not to be a sound approach: not only are the culture-to-currency relationships not 1-to-1, but they are also not N-to-1, since some cultures use more than one currency. In the end, I used the ISO spec to generate some code to load lookup tables and keep everything related based on the ISO numeric code for any given currency. This code is an Int32, and this serves as the only field in a Currency instance, allowing me to represent the Currency as a value type as well. This makes serialization of a Money value quite simple: there are no reference fields in it! One last functionality of Currency to point out: IFormatProvider is implemented on it, so that when ToString() is called on Money, the associated Currency instance is passed with it and it gets formatted as expected.

              And there are systems like this all over the world.

              In this light, your assertion that “This is simply a code; a single entry in a table” is mind-boggling. (More to the point, the Greek people are not well-served by it.) And “simply a code … not a full blown process” ignores that the ISO 4217 codes can generate software on which processes depend. Again, this is mind-boggling.

              NOTE Twenty minutes spent doing work, versus two or three minutes to throw together a claims and a tu quoque. But hopefully readers will benefit from “Armchir Revolutionary” sharing his concerns.

              1. Armchair Revolutionary

                This is just absolute nonsense. You are pulling examples of how some people write code and throwing up you hands and saying this is terribly complex. The relevant questions are as follows:

                1) Can Merchant Service Providers adapt quickly to a new currency code?
                2) Can Card Issuers adapt quickly to a new currency code?

                For business reasons, the answer is yes. It does not matter how they do it. It does not matter if they have used Culture Info in their code or have an ISO table in their code. They are going to do it or they will not have that business. If some fail to adapt, that is their issue. There will be enough providers that can adapt quickly.

                So the only thing to hang your hat on for this argument is something that we (meaning neither you or I) do not have adequate information: will there be a protracted period to issue the new code? I seriously doubt it, but that is just my opinion. I would like confirmation on a time frame, although I doubt I will get it.

                “the Greek people are not well-served by it.” The Greek people are not served well by scare mongering; which is what I perceive Yves and you to be doing at this point. They are well served by breaking down complex problems into less complex ones that can be readily answered.

                1. Lambert Strether

                  Would you please stop waving your hands? I’m giving reasons for why ISO coding needs technical review. That’s all. That has nothing to do with Merchant Service Providers or Card Issuers. Since you have no response to that, you shift. You are now well into “any stick to beat a dog territory.” Please sit down in your armchair and when you have your response from the SIX, share it in some verifiable form. Until then.

  28. Notabanker

    Great post. The payments system is indeed complicated and making structural changes is non trivial. No doubt Greece will be in a mixed denomination society for quite a while, like many, many before them.

    And like those before them they will have to trade with the rest of the world in a global market. They can print all the drachma they want, but at the end of the day they need euros and dollars to buy medicines, food and oil. The rest of the world needs drachmas to buy stuff from or in Greece. The laws of supply and demand will make converting those currencies erratic at best, hence huge risk premiums will also be priced in. Add to that the underlying will of creditors to do business with Greece after default. They will have to buy from the same they have stiffed.

    Whilst the transactional and operational issues of transferring monies will be complicated, the real issue will be what if any demand will there be for drachmas, ie stuff from and in Greece. That is the real issue facing them.

    Internal spending and taxes are monetary supply control issues. Important in that it sets the supply of currency to be priced, but the real issue is the demand for the currency. Say hello to hyperinflation.

    Again, great post, thanks.

    1. Yves Smith Post author


      1. Smart phone penetration in Greece is very low, only 32.5%. Smart phones are a luxury in a depressed economy

      2. This works only internally to Kenya, and only on small transactions. Won’t help with the tourist issue or paying for imports. You need to connect to the international payments system. They’d need to be licensed as a bank to do that, which I can pretty much guarantee would wreck their cost structure.

      1. normansdog

        OK Yves, I give in.
        all of the Greek people are going to die of starvation because their EC cards don’t work.
        They are going to simply sit on the road and wait to be run over – if in fact anyone can afford petrol.
        Lets just all give up now hey?

  29. Littletoot

    Great post, Clive. As an ex-banker, I well know the complexity that underlies even the simplest of bank transactions.

    Again, and again, I am reminded of the old phrase ( from where I don’t remember…) “To every complex question there is a simple answer. The only problem is, it’s wrong. ”

    Words to live by.

    1. Clive

      Thanks. Yes, if I had a £1 for every time anyone’s said “oh, all you have to do is (insert hideously complicated request here), it really is very simple…” then I’d be as rich as Jamie Dimon.

  30. washunate

    Great read. This is why I don’t understand when people blur* debt repudiation, leaving EMU, and changing the currency from the euro to the drachma. Those are distinct actions that a sovereign government can implement over time. One action does not operationally commit a government to another action.


    This is also why concerns over physical cash – having to change out all the ATMs and vending machines – are a minor issue. Electronic payments, from checks to plastic to digital, surpassed government notes long ago. It’s okay to take a few months to physically change over the cash machines. This is a notable strength of Greece since it is already such a cash-based system compared to most of the western world and since shipping and tourism is such a big part of what they do. In a true cash crunch, you will see massive amounts of physical cash come out of hiding domestically and be moved into the country from foreign business travelers, tourists, drug dealers, human traffickers, smugglers, and so forth.

    If “Europe” responds to Greeks renouncing fraudulent debt by blocking electronic international money flows, that’s an issue of political economy, not payments systems. Leaving EMU (but still using the euro) or leaving EMU (and introducing a new national currency) would be potential responses to how Europe handles the debt repudiation. There is no reason Greece cannot continue using euros unless the eurozone engages in a political maneuver to actively blockade Greece.

    In which case, the issue isn’t payments systems anyway. The issue is whose side the American aircraft carrier battle groups are on. Many of the major actors are American, and Greece is a NATO ally. If the USFG wants to continue allowing international trade with Greece, it will ensure Mastercard, Visa, American Express, Western Union, PayPal, and other actors continue processing transactions with Greek banks. If the Fed has to directly monetize a few billion euros during a transition period, who cares; that’s an operational rounding error in a $4 trillion balance sheet. Just look at home much money we have funneled into GWOT or the drug war.

    If the USFG doesn’t want Greece to engage in international trade, it will ensure American financial institutions join the blockade (in fact, it’s probably the Americans leading the blockade…). This isn’t hypothetical. US public policy actively wields finance, telecommunications, IT, and other business activity for its own ends, from spying to Wikileaks. Where’s Ukraine’s gold? Why exactly did we target Iraq and Libya? Iranian sanctions generally and blocking them from SWIFT in particular is one of the events setting the context for where geopolitics has taken us today. Etc.

    Who thinks that the ECB and the FRB have not been discussing the Greek situation over the past five years? And of course, the American firm Goldman Sachs is one of the primary reasons we are in this situation in the first place.

    This has been, and remains, the real choice confronting the non-Anglo-Americans of the industrialized world. Do they want to be vassals of USUK elites, or independent of them? Life isn’t fair; the latter route involves much short term pain and hard work. The thing is, the former has been requiring increasing amounts of pain and hard work, too.

    *Of course, a logical explanation for the haze is that it is purposeful obfuscation of two mutually exclusive conditions. A government cannot run a continuous budget deficit and be part of a larger currency bloc. At some point, either revenues must roughly balance expenses or the fixed exchange rate must give way to a floating one. Government spending only comes from two sources: taking existing currency units away from private sector actors (taxation), or emitting new currency units (money printing). Greece’s only real policy options are to increase taxes in order to pay its debts or renounce the debt itself.

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