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This Is What Capital Controls Will Look Like In Greece

Tyler Durden's picture




 

Yanis Varoufakis says he got the shakedown from EU creditors during his first few days in office.

The Greek FinMin told Parapolitika Radio that during his first week on the job, creditors threatened Syriza with capital controls if they could not come to a swift compromise with the institutions. 

Via Bloomberg:

Varoufakis says he was threatened during his first week as Greek Finance Minister that Greece would have to impose capital controls on its banks if it doesn’t sign a deal with creditors, Greek Finance Minister Yanis Varoufakis says in Parapolitika Radio interview.

 

Varoufakis said couldn’t name the official that threatened him.

While the idea of capital controls may have been invoked in early February merely as a means of extorting the new Greek government, acute deposit flight is now a reality. Indeed, it appears that even in the event a deal with creditors is sealed, some form of capital controls will be necessary as the agreement works its way through the Greek parliament (a process which may be riddled with political uncertainty).

Barclays has more on what capital controls will look like in Greece:

Although progress towards an agreement has been achieved in recent days, the longer unsuccessful negotiations drag on, the more this risk increases. Greek banks continue to bleed deposits and replace them with ELA. We believe that a programme will eventually be agreed and an exit avoided; however, capital controls are a material risk even without an exit. 

 

The focus would initially be on protecting domestic banks through administrative controls (in the event of a bank run). We think Cyprus provides a relevant case study. In March 2013, the Cypriot authorities imposed domestic and external payment restrictions to protect the system from a potential deposit run. In contrast to Cypriot banks at the time, Greek banks today are deemed solvent and there is no intention to bail-in large depositors. We think controls could be temporary as they were in Cyprus, serving as a bridge until a programme is agreed.

 

In contrast, without a new programme, a potential exit scenario would more closely resemble Argentina’s 2001/02 crisis, which also started with deposit controls but – in the absence of an internationally supported plan – quite rapidly deteriorated into tighter controls and a forced currency conversion, followed by numerous restrictions to defend the new exchange rate system.

 

Under severe capital controls, redenomination and nationalisation risk rises. The Greek banks would be most at risk, while the two largest non-financial issuers could potentially continue to service their external debt even after a redenomination of domestic liquidity and revenues. Such a scenario also poses major risks to GGBs and other EGB markets. While privately held marketable Greek bonds are under English law, we still think they will potentially come under severe stress, if in a redenomination scenario Greece defaults to official creditors.

 

Barclays goes on to compare the Greek experience to Argentina and Cyprus:

What the example of Argentina shows is the potential sequence of events in case of a disorderly unravelling of a fixed currency regime. Hence, it provides an idea of potential developments in case of an ‘accidental’ exit from the euro system. The case of Greece would in all likelihood require the introduction of IOUs before those are converted into a new local currency, which may or may not be pegged at a considerably devalued exchange rate to the euro. The extent and duration of controls will also depend on whether Greece remains in the EU after EMU exit (we believe it would); whether there would be a plan for a future rejoining of the EMU; whether it will continue receiving EU financial support; and whether the Eurosystem would continue to supervise the Greek banking system.

 

The controls in Cyprus were required to deal with an insolvent banking system, while macroeconomic and political conditions were considerably less challenging than in Greece or Argentina. Unlike Greece, in the case of Cyprus there was less fear of an EA exit and redenomination risk was more remote. However, bank assets had grown to about 750% of GDP.

 

In contrast, the Greek banking system is relatively much smaller (222% of GDP as of December 2014) and has already undergone recapitalisation as result of the IMF-EU programmes since 2011. In principle, therefore, the banks are solvent (a prerequisite for the provision of Eurosystem’s liquidity). Instead, deposits and capital controls in Greece would result from an accelerating deposit run on Greek banks and/or if the ECB decided to halt ELA – with either event likely to trigger the other (though, in our view, the ECB is unlikely to be the trigger without a breakdown in programme negotiations). Thus, the basic challenge, namely to limit the deposit outflows, would seem quite similar in both cases even if the motivations differed. Depositors would have to be restricted in withdrawing cash and/or transferring deposits outside the domestic banking system (ie, cross border). It is likely, therefore, that restrictions in Greece would look similar to those in Cyprus, albeit with different quantitative limits.

Here is a flowchart which helps to illustrate the possible scenarios and outcomes:

 

*  *  *

So to all the Greek depositors, we sincerely hope that you are not shaken down by Varoufakis the same way he was shaken down by an 'unnamed' EU official.

 

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Thu, 06/04/2015 - 14:33 | 6163768 SafelyGraze
SafelyGraze's picture

conclusions

while debt may be bad for growth, it does not follow that it should be paid down as quickly as possible

http://www.imf.org/external/pubs/ft/sdn/2015/sdn1510.pdf

page 18

Thu, 06/04/2015 - 14:45 | 6163810 NoDebt
NoDebt's picture

Yeah, there was an article about that on ZH yesterday.  It was at that point I realized it's about to time to say "check, please."

 

Thu, 06/04/2015 - 14:56 | 6163847 pods
pods's picture

Debt is really bad, but don't pay it off (because our debt supply is also our money supply, so we can't pay it off or we will implode the economy and get our heads cut off).

That second part is the part that they leave out. I wonder why?

pods

Thu, 06/04/2015 - 15:01 | 6163866 SafelyGraze
SafelyGraze's picture

"Yeah, there was an article about that on ZH yesterday"

yes. sobering report. tip-o-the-hat to aVileRat for the link.

Thu, 06/04/2015 - 15:18 | 6163947 Wolferl
Wolferl's picture

Throw those pathetic Greeks out of Europe already. Let them crash hard into the wall. Throw them under the next bus. It´s the only way those Greek deadbeats will learn to lead a responsible life within their means and how to act and behave in a community of first world countries. No mercy, no indulgence for those Greek liars, cheaters and blackmailers. Throw them out.

Thu, 06/04/2015 - 18:12 | 6164580 edotabin
edotabin's picture

Lol.... was wondering where he was.

 

Thu, 06/04/2015 - 18:14 | 6164581 Niall Of The Ni...
Niall Of The Nine Hostages's picture

And where, pray, are the Greeks supposed to go? Madagascar?

You want your money, you'll find it in the Swiss deposit boxes of the Greek oligarchs. Not far from where they're holding on to the gold you fuckers stole from the Jews. The Greeks don't owe you shit. 

You want Greece? Go get it. Show the world what you'd do to the Jews all over again, to the applause of every skinhead and Turk in Berlin, if Israel didn't have enough nukes to wipe Germany off the map for good.

Fucking coward.

Thu, 06/04/2015 - 14:57 | 6163825 CPL
CPL's picture

Translated:  They want Greece as their bitch so they can get their gold.  After they get their gold, they'll shit down greece's throats and make their lives miserable for 100 years.

 

Whatever greece does, they must not bring all the union stewarts to clog up the proceedings to run the clock because the EU/ECB has a bunch of clauses in their agreements that all labour unions are to be included in anything that effects  pension, work arrangements and benefits.  This also includes all sibling union ties to other countries, like Germany, where the chief stewart or a proxy must be part of the tabled offers to anything effecting budgets.  Anything.  When they drafted this crap in the 90's they did a lot of horse trading to get it started, could park a bus in the holes they left under the union privilage.  Go look at the original agreements to get the ECB/EU started and don't run the clock until september.

Thu, 06/04/2015 - 14:53 | 6163833 Lady Jessica
Lady Jessica's picture

From the final page:

"The economy is closed, and is populated by a single infinitely lived agent who maximizes [insert impressive looking formula here]."

Pure unadulterated....Krugmanese?

Thu, 06/04/2015 - 14:40 | 6163793 Berspankme
Berspankme's picture

Why can't these silly Greek consumers just get out there and spend said Jon Hilsenrath of the WSJ. We need more debt

Thu, 06/04/2015 - 14:45 | 6163809 BandGap
BandGap's picture

On a positive note, those with money in Greek banks had the time to get their money out. Cyprus didn't get that shot and Argentina didn't have the Euro as a backstop, the floor gave out.

25% of Greeks have full time jobs. Wonder how many of the unemployed are on XBox playing World of Tanks?

Tick, tock

 

Thu, 06/04/2015 - 14:40 | 6163797 A_latvian
A_latvian's picture

Dear Grecians:

Open up a cryptsy account (http://www.cryptsy.com), use your still Euro-blessed banks to transfer 50% of your money there, and BUY BITCOINS. Then withdraw the bitcoins to your own machine, or stash them in any of a dozen different on-line wallets. As Michael Bolton said, "Thumbs up their asses man, thumbs up their asses."

(Only 1/2 kidding)

Thu, 06/04/2015 - 14:46 | 6163813 NoDebt
NoDebt's picture

So....... we could call this your "Grecian Formula"?

Thu, 06/04/2015 - 14:56 | 6163831 Dr. Engali
Dr. Engali's picture

 "Thumbs up their asses man, thumbs up their asses."

 

 

I'm Caitlyn Jenner and I approved this message. 

Thu, 06/04/2015 - 14:59 | 6163859 pods
pods's picture

I bet ya that now she's a chick she stops doing anal.

pods

Thu, 06/04/2015 - 15:00 | 6163864 NoDebt
NoDebt's picture

Could we stop with the whole Caitlin Jenner thing?  I've still got an old Wheaties box with him/her on the front.  I can't process this right now.

Thu, 06/04/2015 - 15:02 | 6163873 pods
pods's picture

"Eat Wheaties and you can be just like me."

Can anyone find any old commercials?

pods

Thu, 06/04/2015 - 15:05 | 6163888 Dr. Engali
Dr. Engali's picture

Check this out:

 

https://youtu.be/ADiq-EYObkM

Thu, 06/04/2015 - 15:05 | 6163886 Dr. Engali
Dr. Engali's picture

We can't stop. The MSM says this is the human rights story of the century so we must talk about it.. You could always plaster a picture of Marcy from Married with children on your box of Wheaties to bring it up to date:

 

https://youtu.be/ADiq-EYObkM

Thu, 06/04/2015 - 15:10 | 6163911 pods
pods's picture

I always thought she was kinda cute too. Thanks Doc.  

Had that Sean Young kinda look about her. 

pods

Thu, 06/04/2015 - 14:49 | 6163822 Lady Jessica
Lady Jessica's picture

What happens when the Greek CB's Target 2 liabilities are greater than the Greek banks total deposits?

That time seems to be closely approaching.  Herr Sinn mentioned this being the Syriza trump card, no?

Thu, 06/04/2015 - 14:57 | 6163848 NoDebt
NoDebt's picture

"That would be bad.

I'm fuzzy on this whole good/bad thing, Egon.  What do you mean "bad"?

Try to imagine all life as you know it stopping instantaneously and every molecule in your body exploding at the speed of light.

Total protonic reversal!

Right. That's bad. Okay. All right. Important safety tip, guys. Thanks, Egon."


Thu, 06/04/2015 - 15:10 | 6163908 Lady Jessica
Lady Jessica's picture

I thought that could all be avoided by not crossing the streams.

[PS I sometimes like to be possessed by Zuul the Gatekeeper of Gozer when the mood strikes].

Thu, 06/04/2015 - 18:28 | 6164623 espirit
espirit's picture

Still won't trigger CDS, I'll bet.

Thu, 06/04/2015 - 14:57 | 6163849 Joebloinvestor
Joebloinvestor's picture

I would like a survey on how many barter sites have popped up on Greek social media.....

Thu, 06/04/2015 - 15:11 | 6163918 blindchicken
blindchicken's picture

Tylers .. it would be very nice if you could find someone to shed light on the role of the greek military. They have shown in the past that they have few constraints to further their own interests.

I think there is a real chance that the 'troika' will persuade them with financial and other arguments that a coup would be in the best interest of the Greeks.

The more so, as nobody seems to touch this subject.

 

 

Thu, 06/04/2015 - 18:41 | 6164680 espirit
espirit's picture

I'll play.

Air Farce is all F-35s.

Thu, 06/04/2015 - 18:02 | 6164547 Niall Of The Ni...
Niall Of The Nine Hostages's picture

The Greek banks are deemed solvent? On what planet?

Thu, 06/04/2015 - 18:44 | 6164611 withglee
withglee's picture

In March 2013, the Cypriot authorities imposed domestic and external payment restrictions to protect the system from a potential deposit run.

With a properly managed Medium of Exchange (MOE), there are no bank runs. Why? Because depositors' funds secured in banks have no import on the proper management of an MOE.

Money is created by traders making trading promises. It doesn't properly originate with deposits multiplied by 10. That's just a characteristic of our currently mismanaged (retail) MOE ... mismanaged on purpose by those who profit from the mismanagement. In other words, they're managing in a way most beneficial to them rather than managing in a way beneficial to traders ... who are the reason for the MOE in the first place.

Thu, 06/04/2015 - 19:07 | 6164767 petkovplamen
petkovplamen's picture

my popcorn and Coke(TM) are ready.

Today it's Greece, tomorrow it's Italy and Spain.

Yet the Serbains wanna join the EU. Go figure.

Thu, 06/04/2015 - 19:04 | 6164770 MaxThrust
MaxThrust's picture

Staying on the subject buy changing the direction. Try googling the following and see if you get a result.

1. limit Bank lending to control inflation

2. restrict bank lending / loan creation to control inflation

I have not been able to get one result for these searches. Surely some Phd or University professor has written about this subject but the Internet is silent. How can this be ?

 

PS: I got the Idea while I was visiting Addis Ababa - Ethiopia on business . I was sipping their fantastic coffee in a small roadside shop while reading the local English newspaper and there was an article which stated that the banks were approaching the loan creation limit. It was November, which meant that loans were going to run out before the end of the year and new customers would have to wait until the new year started. I thought, hey, that's a great way to control inflation. But it would seem, some very powerful interests have made sure, such ideas do not permeate the web.

 

Max

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