While the trading algos are blissfully honing their headline-scanning skills (it should take no longer than a few nanoseconds to find whether "patient" and "international" are in the FOMC statement) ahead of tomorrow's Fed announcement and avoiding any macro developments from around the globe, the biggest international news hit earlier today when Greece came one step closer to if not a Grexit, then a full blown bank run and capital controls when none other than the chair of the Eurogroup Jeroen Dijsselbloem became the first European Union official to suggest the possibility of capital controls to prevent Greece leaving the euro, which in turn drew a furious reaction from Athens, which accused him of "blackmail."
Quoted by Bloomberg, Dijsselbloem said that "It’s been explored what should happen if a country gets into deep trouble -- that doesn’t immediately have to be an exit scenario,” he said. For 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.”
In Athens, the insolvent but proud government issued an angry reply: cited by Kathimerini, spokesman Gavriil Sakellaridis said "It would be useful for everyone and for Mr Dijsselbloem to respect his institutional role in the eurozone. We cannot easily understand the reasons that pushed him to make statements that are not fitting to the role he has been entrusted with. Everything else is a fantasy scenario. We find it superfluous to remind him that Greece will not be blackmailed."
Considering Greece has been blackmailed from day one of the new Syriza government with the only motive that matters money, thus forcing the government to not only give up on all of its pre-election promises, but to soon implement even more "austerity" than the much hated Samaras regime, that statement in itself is superfluous.
But is Greece truly on the verge of capital controls, especially the kind that has the blessing of the very man who created the Cyprus "blueprint"? For the answer we go to ISI, which discussed just that in a flash note issued earlier today:
Greece Capital Controls?
Dangerous talk today about the possibility that capital controls may be needed in Greece from Dutch Finance Minister Dijsselbloem who heads the Eurogroup of finance ministers. We have repeatedly highlighted this risk. But for a senior eurozone official to do so is striking as it could easily become a self-fulfilling prophecy. Small wonder there was sharp push-back from the Greeks.
The risk of capital controls is indeed elevated for a simple reason: in the absence of substantive progress by Athens in implementing measures that will lead its creditors to release additional bail-out funds, the ECB cannot plausibly provide fully elastic lender of last resort support for Greek banks facing runs through ELA.
In the absence of a credibly elastic lender of last resort, it would be rational - in the sense of the classic Diamond / Dybvig model of a rational bank run - for Greek depositors to pull out their deposits rather than risk being the last to do so. In the event of such a run the imposition of capital controls may be viewed as the least bad available option to stabilize the financial sector.
In the real world deposits can be surprisingly sticky, particularly when as in the Greek case depositors with easy access to overseas banks and alternative financial products left a long time ago. And, the bank stabilization fund remains in place with substantial committed funds to support bank solvency.
The Eurogroup cannot impose capital controls on Greece. Our understanding is that only the Greek government can impose capital controls (restrictions on bank withdrawals, cross-border transfers) and this would require the consent of the European Commission, as guardians of the single market.
Tsipras knows how unpopular this move would be and has no desire to be driven into it. The ECB could force Greece by making capital controls a condition for continued ELA, but is trying hard to avoid becoming an active player in the Greek drama.
Still, a resumption of accelerated deposit drain as the conflict between Greece and its creditors continues seems quite plausible. And if this happens the list of options is very thin.
The fact that Dijsselbloem has highlighted the possibility of capital controls makes this outcome more likely. Depositors may now withdraw funds to avoid restrictions on their bank accounts and end up forcing the very imposition of capital controls their individual actions were intended to preempt.
What is going on? One possibility is that Dijsselbloem made a rookie mistake at a time when he is deeply frustrated with Athens. Another is that he fully intended to ramp up pressure on the Greek government to move forward with program implementation by raising the specter of Greek citizens being unable to access their bank accounts. Neither is particularly encouraging.
We continue to worry a) about the capacity of the Greek government to implement at home without a rupture in the ruling coalition and b) that the eurozone authorities are complacent about the degree to which they can retain control of the situation while allowing stress to mount in Greece as much as needed to ensure the domestic politics yields to program implementation.
Loose talk about how capital controls worked in Cyprus understates major differences in the political and economic context. Capital controls would be much more damaging and difficult to implement in Greece, which has an economy much larger and more complex than that of Cyprus with vastly greater payments and settlements needs.
Moreover if capital controls were imposed as a product of a stand-off between Greece and its creditors rather than in the context of agreement as to the way forward (as ultimately in Cyprus), Greek politics could lurch towards the need for a parallel / substitute currency rather than as hoped towards commitment to the euro at all costs.
Raising the prospect of capital controls does pile the pressure on Greece and may ultimately be part of the forcing mechanism that delivers implementation and funding. But this is playing with fire.