Readers have hopefully taken notice of India’s botched effort at demonetization. Our Jerri-Lynn has chronicled the chaos it has created across the economy, particularly for farmers and the poor. One story we linked to described how a company that did not deal in cash nevertheless took a huge revenue hit.
One problem with any effort to demonetize or introduce new currency is that it needs to be done in secret so as to prevent retail and business customers from gaming against the central bank. Even so, India’s effort showed a shocking lack of understanding of how currency was actually used in the economy, as well as an abject failure of planning.
Outsiders might chalk this up to India being India, as in famous for not having the greatest bureaucracy.
But we were stunned by an exchange yesterday with an economist who has written things that are quite sensible in the past. The subject was a Greek exit from the Eurozone, since Greece is up for yet another bailout negotiation. The IMF is saying, as it has for the last two years, that the Greek debts are not sustainable and it therefore needs debt reduction, meaning writedowns. But as we describe longer form in a related post, that is anathema to European governments. Under their budget rules, they’d need to recognize those as losses, which means they would have to raise taxes or cut spending to fill the gap. That would be economically contractionary as well as hugely unpopular.
In addition, it is possible that the IMF might be able to sit out or have a very reduced role if the Trump Administration does not pressure the IMF to stay in. It’s over my pay grade to sort out this far in advance how things might play out. The EU lenders regard IMF participation to manage the borrower country as essential, since they don’t have staff to do that sort of baby sitting. However, the irony here is while the Greek public hates the IMF due to its historical role, the IMF is now the most reasonable and sympathetic member of the Troika (which admittedly is a low bar, what the Japanese would call a height competition among peanuts). Thus the irony is having the IMF depart or play a smaller role is likely to result in even harsher treatment for Greece.
With this as background, our economist brought up the idea of a Grexit. While we understand why this idea sounds appealing (who wouldn’t want to flee from a cruel gaoler?), we looked at the operational issues in considerable depth in 2015. As hard as it may be for non-bank-IT readers to believe, it would take the better part of a year merely to get physical currency printed and distributed. But the bigger issue is that reintroducing a Greek currency, from a systems perspective, will take over three years due to how many parties are involved, how much non-standard code kluged over many years has to be reviewed, and how many parties won’t give a redo very high priority. There are good reasons why it took eight years of planning and three years of transition for the introduction of the Euro to go smoothly. And a ton of code and modules have been written since then.
Here was the, erm, remarkable idea that our economist offered, and it apparently came from “central bank people”:
I’ve spoken to central bank people. It’s no big deal.
You stack the ATMs with stamped euros. You can print them and stack them over a bank holiday weekend.
For imports the domestic CB sets up an account with the ECB or other domestic CB. Can be done in minutes. Like setting up a new savings account down the line. Ditto for exports.
Now anyone who knows anything about about bank IT knows that absolutely nothing happens in “minutes”. Even projects that seem trivial take months. And the IT part extends across banks and other payments systems participants. We won’t belabor that part here, you can read some of our many posts for details (see here, here, here, here, and here for starters). In comments, bank IT pros all said if anything our assessment was optimistic.
We got more detail in further messages:
The euro numbers would be wiped out. Either by reprinting them with new numbers or by bleaching them if they are physically stamped. You could physically stamp the currency in the banks in house. All they would need would be a barrel of ink, a bunch of stamps and some bleach to get rid of the serial numbers.
The ATMs need not change at all. They will look the same on Tuesday as they did on Friday. They will just spit out stamped euros that will now be counted as drachmas. The stamped euros can either be reprinted with an integrated stamp or literally stamped inside the banks over the bank holiday weekend with old fashioned rubber stamps.
I suggest you work though in your mind what it would take to collect and physically stamp huge amounts of currency. You need to sort the bills so they are all oriented the same way, then have them bleached and stamped, and then they’d need to be checked too.
But putting that aside, let’s turn over the mike to our payments systems expert Clive:
Dumb thinking must be rebuked on sight, in my opinion! Otherwise, it’s contagious… “The ATMs need not change at all.” Utter, total rubbish!
You are totally right about the bulk cash handling side of this suggestion – just “stamping” the old euros is a logistical nightmare because you have to be 100% sure you’ve stamped all legacy euro notes in issue. We’ll gloss over what you’re supposed to do with coins too. You can’t stamp those so presumably you’re supposed to manage without lower denominations of your currency and anything that needs coinage.
Economist X is such a clever guy normally, but as all-too-often happens, when people want to believe in something and they have gaps in their knowledge, they fill in the gaps with magical thinking that fits in with their idealised solutions. Unless you really – really, as in operational knowledge – understand how an ATM works specifically and the payments systems work in general then it is unwise to speculate and even more unwise to rely on that speculation.
First things first. let’s look at the ATM side. You can indeed fill an ATM’s cash hopper with anything you like, so long as it matches fairly closely the properties of the voucher it was designed to accommodate. So you can put euros in euro-compatible hoppers, dollars in dollar hoppers or whatever. If you, then, filled a €20 hopper with stamped €20 notes, it would “work” – the ATM would happily issue the “new” currency.
But let’s just stop there for a second.
Has no-one ever wondered why, exactly, such care is taken in note design by central banks to make sure that not only are one country’s denominations different within each currency, but also that each country’s notes are different to all other country’s? To stop precisely the scenario which is being proposed here
ATMs, parking meters, vending machines, self-scan checkouts and so on cannot — repeat – cannot be allowed to have a voucher inserted that can be mistaken for a different voucher. There would be nothing to stop “stamped” euros being taken into another euro-using country (and, I imagine, obtained at a huge discount to the old euro face value) and spent in such merchant equipment. Put it this way, if you could obtain unlimited quantities of these “discounted euros” in another country, then return to a real, proper euro-denominated country and spend them in automated checkouts, well, I would be on the first plane there to take advantage of this chaos.
Leaving that point aside and returning to the ATMs, okay, you can get the ATMs to issue the stamped euros. But what happens in terms of a money transmission system transaction? You put your card scheme (VISA, MasterCard etc.) card in the ATM, request the desired amount of “stamped” euros and then the ATM issues the notes. Let’s say you’ve asked for 100 “new currency units”. The ATM issues, say, 5x “stamped” €20notes.
But unless the ATM’s microcode and the card schemes are updated to know that this particular ATM is no longer dispensing real, genuine euros but now, instead, “stamped” euros, then the card scheme will assume that it has just given you 5x €20 “proper” euro notes. The card scheme of the card you’ve just used will send the transaction back to the account (either checking or a credit card account) which has issued you your card and will request authorisation for a €100 cash withdrawal.
I think you can see what’s coming next. If you are, for example, a tourist and your account is held outside the country, the card scheme will present a €100 debit request and, assuming you have sufficient funds on the account available to stand that, authorise the owner of the ATM to collect that €100 via the international payment system (there may be a long, long chain of banks and other parties in the end-to-end transaction). The settlement will happen automatically. But when you check your statement and see a €100 debit, you’ll say to your bank “hey, wait a minute, I didn’t get euros, I got those crazy stamped notes which were only worth about (say) $30”.
You’d request a chargeback. Depending on the attitude of the ATM owner, they might well refuse (I don’t see how they’d have any choice at all but to refute the chargeback) and do a chargeback reversal. The card scheme would be in the position of having to arbitrate.
Except they wouldn’t The card schemes are not resources and not prepared to even get involved in this kind of sticky mess. They’d – within 24 hours – block all transactions from the country issuing the “stamped euros”. Anything and everything coming from ATMs, EPoS, card-not-present and other transactions would get a straight decline when the authorisation was requested. The card schemes would show no mercy and cut no slack. Most likely, the offending country would not be allowed to participate in the merchant side of the card schemes for years to come, until the offered absolute certainty they wouldn’t be causing the sorts of trouble that the proposal below would generate.
Visa and Mastercard are both public companies in the US. They have no business reason to cut Greece any breaks. Mind you, “not participating in the merchant side of the card schemes” means not just that ATMs would be cordoned off, but all merchant accounts, such as retailers, hotels, restaurants, and car rentals.
No wonder why economists are so keen to get rid of physical currency. They can’t bring themselves to talk to operations people who might tell them their clever schemes won’t work.