The risk of capital controls is allegedly high as Greece rejects creditors’ absurd demands and dictates. The risk is considered “high” because the uncertainty pushes more and more savers to withdraw more and more money from the banks that on their part rely on Emergency Liquidity Assistance provided by the European Central Bank in order to survive.
Two factors for potential capital controls are:
•Failure in the talks at the eurogroup
•Greece’s missing the payment to the IMF
With the second factor being more economically relevant and the first being rather political.
According to some reports in German media like Suddeutsche Zeitung, if there is no agreement at the Eurogroup meeting on Thursday “the hawks on the ECB’s Governing Council may begin to step up their calls for restrictions on ELA operations,” notes Bloomberg.
But in case Greece misses the IMF payment, euro-area central bankers would probably decide that lenders are no longer eligible for ELA because the guarantor (Greek collateral like government-guaranteed bonds, Greek sovereign notes and Treasury Bills) is not solvent.
“Alternatively, the ECB could impose a very high discount on the face value of Greek collateral, thus setting a hard cap on maximum potential ELA,” stresses Bloomberg adding that “The ECB might even shut down ELA immediately.”
Tsipras would have no other choice than either impose capital controls or let banks collapse.
What is clear is that Capital Controls will hurt the Greek economy, even though no one knows or can predict the Capital Control Specifics for Greece. It is up to the Greek government and the Central Bank to decide, anyway.
As capital controls is the latest scare-mongering mantra of pro-austerity and pro-capitulation supporters in and outside Greece, a lot of science fiction scenarios are been pushed around. Ignorance and propaganda prevail with warnings – even by journalists – like “Greek companies will not be able to import goods,” “parents will not be able to send money to their children studying abroad” and other nonsense of the kind suggesting that “economy will collapse” and nothing will be functioning anymore .
But Bloomberg has an informative summary of the specifics of another eurozone member that imposed Capital Controls, that is Cyprus on 29th March 2013.
*ATM withdrawals were capped at 300 euros a person per day.
*Transfers of more than 5,000 euros abroad were subject to approval by a special committee.
*Companies needed documents for each payment order, with approvals for over 200,000 euros determined by available liquidity.
*Parents couldn’t send children that were studying abroad more than 5,000 euros a quarter.
*Cypriots traveling abroad could carry no more than 1,000 euros with them.
*Termination of fixed-term deposits was prohibited, while payments with credit and debit cards were capped at 5,000 euros. Checks couldn’t be cashed.
Of course, capital controls would hurt major sectors of Greek economy like imports, tourism and retail sales, but they “would allow Greece to buy breathing time.”
An important aspect of imposing such a measure is that it is not announced in advance in order to avoid a First Class Bank Run.
Capital Controls need the element of surprise with a longer bank holiday. So the country has time to negotiate an accord with eurozone member states and the IMF.
A “long bank holiday”? A holiday longer than a Saturday-Sunday weekend? The next long bank holiday on Greece’s calender is scheduled for December 25th, 26th and 27th 2015. Hm…
Read the full Bloomberg Article “Greece Capital Controls: How do they work? Questions & Answers before you get overwhelmed by the usual [add word].
However, Cyprus‘ capital controls had also a very nice bail-in, but that’s not a “template for other EZ countries.” Is it? I have to call Dijsselbloem and ask him…
PS some Greeks are even delighted to be allowed to withdraw from ATM 300 euro per day, as they currently withdraw just 30 euro per day. And others long to see their credit and debit cards limit raised to 5,000 euro, from currently 100 euro. Just Kidding… It is probably the same Greeks who are so fed up with the creditors’ pressure and absurdity, so exhausted from the unemployment and their broken lives, that they think they have nothing to lose. And that’s not kidding, that’s serious.
I don’t know if this is or is not related, but I can’t seem to find the answer anywhere. Perhaps you might know where I can find it. I live in Greece, but have no bank accounts here. I telecommute as a writer for an American company, and get paid in US dollars to my debit card via electronic transfer; I withdraw my pay in euros from the ATMs here. How, if any of this fiction comes to pass (which I doubt), or if Greece withdraws from the euro and re-institutes the drachma, will any of this affect people like me? It will be good if I can still get paid, then I can help my friends who can’t, and also still pay the very nice pensioners who I rent from.
The only paraallel I could find was Zimbabwe, and they wouldn’t accept foreign currencies when they created and instituted their own, at first.
First of all I think this scenario is still unlikely.
In Cyprus tourists didn’t have a problem when capital controls were introduced for Cypriot accounts.
If there was a new currency, it would probably devalue from the start, so your salary might be worth much more then.
The Greek Central Bank might introduce capital controls if the Greek banks are no longer provided with ELA by the ECB.
The ECB might reject a Greek ELA request by a two-thirds majority, if Greece doesn’t serve the IMF, but I don’t think so. Still Greek banks will be more cautious to buy Greek T-Bills, because the ECB decides whether it accepts them as collateral. So it might get impossible for Greece to refinance its T-Bills. If Greece defaults on them, Greek banks holding them might go bankrupt.
ps my withdrawals have always been limited to 300 per day for some reason. Possibly because I don’t hold an account.
pps I just read the Bloomberg article, and like everyone else, they out the onus on Greece “making a decision.’ Ti den katalavenete?
Luarette
You have a good question. Are you an American with a “regular” debit card issued by an American bank?
Capital controls are an attempt to control the movement of currency in a country, and won’t prevent your employer from electronically transferring cash in USD to your debit card.
-Assume there are capital controls implemented while Tsipras negotiates, but in the end they make a deal and Greece stays within the Euro.
Even in this scenario you certainly will be effected. In Cyprus the limit was 300 euros, but this was with “carefully choreographed” capital controls. Cypriots unambiguously knew they were staying with the Euro at the time given their gov’t had accepted the deal from EU institutions.
If capital controls are implemented and Tsipras hasn’t inked a deal, you better believe the limit will be well under 300 euros. These would be capital controls initiated in the fog of uncertainty. Euros will drain out of the banking system as fast as they can. What this means is that whether the issuer of your card is Bank of America or Alpha Bank, money will still be transferred from your employer, and you’ll be able to see your balance, but you won’t be able to withdraw any of it, or at best a small portion of it.
Of course, you’ll still be able to pay your rent, you’ll just have to say, “IOU” or perhaps write “IOU” on a piece of paper.
-Assume there are capital controls implemented followed by an introduction of the Drachma.
The same as above would happen, but depending on the issuer of your card you could be a lot worse off.
1. If your debit card is issued by National, Alpha, Eurobank, Piraeus, Hellenic Postbank, etc. than the remaining balance on your card will convert from USD to Drachma the day of the re-denomination. A reasonable estimate is that the day the Drachma is reintroduced, it would be worth 50% of a Euro.
2 Drachma : 1 Euro. For the sake of conversation, we can say ~ 1EUR=1USD so 2 Drachma=1USD. The critical point here, and why this will be a humanitarian crisis, is that in one day the price of anything not native to Greece will skyrocket in value. If you take medicine that is imported from abroad it will in the span of one day double in price. Even if just a single ingredient is imported from abroad, that component will increase 50% in price for a Greek manufacturer, who will subsequently charge you more.
2. If your debit card is issued by, say, Danske Bank or Societe Generale or J.P. Morgan or any other bank not domiciled in Greece, you will still get your payments in USD, you will still see your balance in USD as you’d expect, but you would simply be withdrawing your USD in Drachmas receiving 2 Drachmas for each USD. In real terms, your purchasing power doesn’t change.
The bottom line Laurette is that this will be a catastrophe. Just implementing capital controls will not be pretty. With less money to spend, you probably will be conservative with it. Local businesses without your business will go out of business. They will need to lay off their workers. The effects will ripple through your neighborhood and country. Let’s hope there’s deal.
Josh
Just small correction…
Regarding conversion of USD to Drachma, I think that USD deposits are secure. The conversion should occur only from “old” domestic value to “new” domestic value… so in other words from EUR to Drachma. Deposits in any foreign currencies should not be touched (otherwise it would be pure stealing). Ok, also conversion from EUR to Drachma will be kind of stealing (in sense of value of the money)… but this is another story.
The problem that holders of foreign currencies could face is that they could not withdraw the money that they have (as you explained).
Anyway, I totally agree with the following:
“this will be a catastrophe.”
Completely agree with you m&m. I stand corrected. It would not make sense to redenominate USD to Drachma since its not the “old” domestic value.
That being said, god forbid Laurette’s money is in National Bank. Her USDs are probably commingled with euros, yens, kronas, rupias, and pesos in one giant disorganized general ledger. In the heat of a catastrophe what accounts were nominally segregated on the books may all the sudden not be so segregated and evaporate along with all the euro fractional deposits.
Thanks for all of your answers. I’m just sitting tight and waiting with everyone else.
BTW. It is Master Card debit card held on a US bank. I have used it all over Europe and the US. I have no bank account here at all.
KTG
You understand that the capital controls in Cyprus were done within the context of working together with the rest of the EU? The capital controls in Cyprus were implemented at the same time as a comprehensive agreement was signed with the rest of the EU. Thus capital controls were still implementable with some flexibility.
This situation with Greece is different. Here we have a gov’t that is hostile to the institutions. I can imagine similar generous limits would swiftly be maxed out. At best, the capital controls would start with the Cyprus Precedent, but very quickly proceed to becoming more restrictive.
More likely, the relevant EU bodies or the Greek Central Bank would offer Tsipras a blueprint for capital controls that on the outset are much more restrictive than the Cyprus Precedent.
No Greek bank will survive as that’s the money of the savers and not the money of the banks. So as there are normally only max 5% of the peoples money in the banks they’d better decide to put the rest 95% aka the peoples money inside.
http://www.grreporter.info/en/greek_banks_unable_pull_their_capital_out_macedonia/12839