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Eurogroup Chairman Jeroen Dijsselbloem yesterday raised the prospect of potential capital controls in Greece. But how likely is such a scenario and what could bring it about? Open Europe’s Raoul Ruparel investigates.
18 March 2015
In an interview with Dutch BNR Nieuwsradio yesterday, Eurogroup Chairman Jeroen Dijsselbloem said:
It’s been explored what should happen if a country gets into deep trouble. That doesn’t immediately have to be an exit scenario…[In Cyprus] we had to take radical measures, banks were closed for a while and capital flows within and out of the country were tied to all kinds of conditions, but you can think of all kinds of scenarios.
Despite some slips earlier in his tenure, notably around Cyprus, Dijsselbloem is a fairly shrewd operator and has become very deliberate in his language. Given the recent news flow around the lack of progress on the ground in Athens and the lack of cooperation with the ‘institutions’ (European Commission, IMF and ECB), it seems likely that he was using the opportunity to send Greece a veiled message. It is also a similar message to the one the ECB has been sending to Greece with regard to its limit on the Emergency Liquidity Assistance (ELA) – namely that it needs to get its act together and start enforcing the February extension agreement, or things could spiral out of control.
Dijsselbloem’s comments did not go down well in Athens. Greek government spokesman Gabriel Sakellaridis told Bloomberg:
It would be useful for everyone for Mr Dijsselbloem to respect his institutional role in the Eurozone…We don’t easily understand the reasons that drove him to make statements that don’t fit the role he’s been entrusted with. All the rest are fantasy scenarios. Needless to say, Greece won’t be blackmailed.
The logic is fairly simple. If the situation worsens again, as now looks possible, Greece could once again see an increased level of deposit flight, and potentially even a bank run. As the graph below shows, in January the uncertainty led to the largest outflows of deposits since the crisis started. In such a situation, capital controls could help stop the deposit outflow and stabilize the banking system. By stabilizing the banking system, the risk of a serious downturn in the economy is somewhat reduced.
Technically, capital controls should never really be needed in the Eurozone due to the nature of the Eurosystem. In theory, banks can continue to tap ELA emergency funding as long as they have some viable collateral (for which the standards are very low). Even if the money is flowing out of Greece to other countries in the Eurozone, the Target 2 system simply accrues liabilities to the Eurosystem. This liability rises on the Greek Central Bank’s balance sheet to replace any deposits lost from the system. As such, deposit flight should not directly lead to a funding crunch for the banking system. This is what has been happening so far, as the chart below shows.
But as we have seen, things can shift in the Eurozone crisis for a number of reasons. So, in what scenario could capital controls emerge?
One important point to note is that Greece is in quite a different situation to Cyprus when it imposed capital controls despite some superficial similarities.
Overall, I believe capital controls would be a last resort for Greece. They do not really tackle the fundamental problems facing the government and may only be useful to buy a few extra days in the case of a very tight negotiation. Even then, the situation would have needed to have reached the stage where the ECB has limited ELA. This alone, even with capital controls, may precipitate a Grexit. Cyprus and Iceland have shown they can be useful in specific situations to help stabilize a financial sector undergoing a deep restructuring – though they are hard to remove once imposed. In the end, Greece’s current problems run far deeper than that.