Capital controls, a brake on the Greek economy

Demonstrators hold a banner reading ‘No’, written in Greek, during a protest outside the Hellenic Parliament in Athens July 22, 2015. The Greek capital is checking a curb on its economy afp_tickers

This content was published on July 23, 2015 – 14:34


The capital controls imposed in Greece at the end of June could last several months, according to economists, who fear that this emergency measure to protect banks could become a drag on the economy.

Since June 29, it is almost impossible to withdraw money in Greece. Any payment to a foreign supplier must be approved by a government commission, a measure that slows down economic activity and at the same time causes the mistrust of these same creditors, who ask to cash in advance.

You also cannot open accounts or buy shares abroad, except in two cases: that of Greeks who study abroad, who can receive a maximum of 5,000 euros per term, and that of those who receive medical treatment abroad, who can receive a maximum of 2,000 euros.

Meanwhile, in Greece, it is forbidden to withdraw more than 60 euros a day, a measure which Greek Economy Minister Giorgos Stathakis said could last “for months”.

The objective of these drastic measures is to protect the banks from a general flight of capital, encouraged by the uncertain future of Greece and the serious economic crisis it is going through. Since December, nearly 40,000 million euros have left the country.

– Capital controls, “difficult to remove” –

“The problem with capital controls is that it’s very easy to impose, but very difficult to remove,” said Diego Iscaro, an economist at consultancy IHS. Or, as Dietmar Hornung, an analyst at financial ratings agency Moody’s, puts it, “trust (in banks) is lost quickly, but gained very slowly.”

This was the case in Iceland, which is only beginning to lift the capital controls that came into force in 2008. In Cyprus, a member of the euro zone like Greece, the restrictions imposed in 2013, when it decreed that bank deposits must also be used to recapitalize banks (so-called ‘bail-in’).

“Even in Cyprus, with a government fully involved in the reforms and with a process that worked well, it took two years” to lift the restrictions, recalls Frederik Ducrozet, economist at Crédit Agricole.

According to another economist, Frances Coppola, “most of the big investors have already withdrawn their money” from Greece. “What remains is mainly the capital that businesses need and touching it would be much more destructive” than it has been in Cyprus, where the “bail-in” has mainly affected foreign depositors, especially Russians.

According to Ducrozet, if the deposits were finally affected, as feared by many Greeks, “small and medium-sized enterprises would have to be protected” so that the country’s economy does not sink further.

The rating agency Standard and Poor’s predicts a recession of 3% for this year in Greece. Of the 129 countries assessed by the consultancy, only Ukraine, Venezuela and Belarus have worse prospects.

However, before lifting capital controls, Athens will have to shore up its banks, meaning they will have to pass the European Central Bank’s stress tests and then be recapitalized through a bailout still being negotiated.

In the agreement between Greece and its creditors signed on July 13, there is talk of a package of 25 billion euros to save the banks. Frederik Ducrozet is however more optimistic and estimates that it will only take “between 10,000 and 20,000 million” provided that certain “bail-in” measures are applied.

Once the recapitalization is complete – or even sooner, if the ECB so decides – Greece could start raising the withdrawal cap and allowing some transfers abroad.

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