This Is What Capital Controls Will Look Like In Greece

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:

 

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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.