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Reports have been circling this afternoon that, at a meeting in Bratislava, officials of the Euro working group have been discussing potential plans for a Greek default, including various options for Greek capital controls. With a deal looking as far off as it ever has, the risk of such controls is growing. Open Europe's Raoul Ruparel lays out all you need to know.
12 June 2015
It’s likely that such controls would need to be brought in over the course of a weekend, though I expect they may also need to be combined with some bank holidays anyway.
A significant impact. Greece is still predominantly a cash economy. As such, capital controls have the potential to create a huge liquidity crunch. This was seen in Argentina in the early 2000s when capital controls were imposed.
Generally, the limits on withdrawals as well as transactions will make it very hard for companies to do business. Foreign business in particular will become difficult. The overall impact will depend for how long the controls stay in place for and how stringent they are. Cyprus was able to remove the capital controls after two years (after periodically loosening them) while Iceland is only now expected to remove its controls, 8 years after they were imposed. For Greece, the controls will only be able to be removed once the risk of Grexit has been tackled. This means probably once a short term and long term deal have been struck with the Eurozone over how Greece will fund itself for the coming months and years.
As discussed before, there are a few scenarios which could trigger the need for capital controls:
Overall, if there is no deal soon then capital controls will look increasingly likely, especially as we close in at the end of the month when there is a tough IMF payment to make and the bailout expires.
This seems an obvious answer given all of the above – to halt bank runs and stop money flowing out of the economy. But there is a wider question that needs to be answered. What would be the aim and end goal of capital controls? Ultimately, capital controls are only really of use when it comes to buying to time or pushing through some tough policies. In Cyprus and Iceland the controls were needed to impose tough write downs on foreign depositors/investors but stop huge outflows of money. But the actual write down was over fairly quickly. But in Greece the problem is a long term malaise and huge uncertainty over its future position in the Eurozone – not a singular one off event for which time needs to be bought.
In the end then, I find it hard to see why the Greek government would want to go for capital controls. They would only be of use if we got to the stage where a deal was close but couldn’t be struck in time. But if we get to that it will be because the differences between Greece and its creditors could not be solved over the past 6 months. It’s not clear that a few extra days, weeks or months under capital controls would drive an agreement. It’s also not clear why the government would want to put the economy and people through the pain of such controls to then just agree a deal. Why not just agree one now? Surely, it doesn’t seem likely that Greece’s negotiating hand would be stronger under such controls?
So, while capital controls are technically possible, I have failed to see any clear answer as to why they would actually desirable, especially from the Greek perspective.
That is why I believe that capital controls would most likely be a prelude to a Grexit. At least here they would serve a clear purpose – allowing time for the transition to a new currency to be organised and negotiated. They would likely need to be even more stringent and probably involve longer term bank holidays. Therefore, when capital controls start to become seriously discussed, it is probably quite a negative sign.