As "Options Run Out", This Is What Greek Capital Controls Would Look Like

In what is being billed as a “last ditch” effort to secure an agreement with creditors, Greece’s negotiating team is in Brussels this weekend, where the focus is on crafting some kind of mutually agreeable proposal that can be presented at a scheduled meeting of EU finance ministers next Thursday. 

There were reports on Saturday that Greek PM Alexis Tsipras was attempting to trade concessions on Greece’s ‘sticking points’ (i.e. the “red lines”) for debt relief (i.e. writedowns), but by the end of the day that rumor, like all the others that emanate from Brussels these days, had faded. 

On Sunday negotiations will continue with EU officials having seemingly moved from exasperation to ambivalence. Here’s FT:

Talks between Athens and its international bailout creditors were expected to resume late on Sunday after Greek government officials were told to submit a final list of economic reforms in order to secure €7.2bn in desperately needed rescue aid.


The request came in a meeting in Brussels on Saturday between Nikos Pappas, aide-de-camp to Alexis Tsipras, Greek prime minister, and Martin Selmayr, chief of staff to Jean-Claude Juncker, the European Commission president who has played a central role in trying to broker an 11th-hour deal..


“Positions are still far apart,” said one EU diplomat. “It’s not certain there will be an outcome.”


Another senior eurozone official said the Greek team returned to Brussels on Saturday without new proposals and that Sunday’s evening session would be a “last try.”


“Greek movement [is] not discernible,” said the official. “I think they do not want a solution.”


“A credible proposal needs to be tabled by the Greeks in the next 24 or so hours,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “Otherwise it’s looking like game over for Athens.”

Whether or not it would truly be “game over” for Greece should Tsipras’ negotiating team fail to table something “credible” by Monday is certainly debatable. After all, EU officials said the exact same thing on Thursday and here we are on Sunday listening to the same tired rhetoric.

The truth is that as long as Tsipras can get an agreement in principle sometime over the next three weeks (or maybe even in the next five weeks), Greece can probably avoid a default. If Greece were to miss a payment to the IMF, Christine Lagarde would need to send a formal failure to pay letter to the Executive Board. Only then would Greece actually be in default. It’s up to Lagarde to decide when to send that letter and she would have at least 30 days. The set up for EFSF loans is similar, and besides, it seems exceptionally unlikely that either EU creditors or the IMF would put Greece into formal default while a deal is working its way through the Greek parliament, meaning all Tsipras really needs to do is get something on paper that has a chance of flying with Syriza hardliners and get it to the floor before July 20, when a payment to the ECB comes due.

As such, the real short-term risk likely isn’t cross acceleration rights in the event of a formal default to the IMF on June 30, but rather what happens to the Greek banking sector when depositors — who are already pulling hundreds of millions of euros each day from ATMs — find out that Athens has missed the €1.5 billion bundled payment without cementing a deal.

Irrespective of the political wrangling going on behind the scenes both in Athens and in Brussels, a terminal bank run could plunge the country into a crisis faster than politicians can react, an eventuality which would have to be met with capital controls. In “This Is What Capital Controls Will Look Like In Greece,” we took an in-depth look at this eventuality and presented the following graphic which helps to illustrate several potential scenarios:

FT has more:

“We are four to six weeks away from the possible imposition of capital controls,” said Daniel Gros, director of the Centre for European Policy Studies think-tank in Brussels. “There is always some temporary solution [eurozone politicians] can pull out of thin air, but now we are getting really close.”


Were Greece to default on a €1.5bn payment to the International Monetary Fund due at the end of June, the situation could spiral out of control, forcing the hand of policy makers. Greece could then be forced to repeat the experience of Cyprus and Argentina, which chose to intervene to stop their banks bleeding deposits in order to avoid insolvency.


But imposing capital controls would hardly be straightforward.


Such measures are frowned on by the EU treaties, which sanctify the free movement of capital — together with labour, goods and services — as one of the union’s four pillars.


It would be up to the government to enforce unpopular measures, such as limiting citizens’ cash withdrawals, exposing Athens to political blowback from angry citizens.

And here’s Open Europe with more color on what capital controls will look like in Greece:

How would Greek capital controls be implemented and what form might they take?


It’s likely that such controls would need to be brought in over the course of a weekend, though I expect they may also need to be combined with some bank holidays anyway

  • Cash/ATM withdrawal limits: This would be a vital control in order to halt the huge outflow of deposits which has been taking place and which will pick up if a deal isn’t struck soon. In Cyprus the limit was set at €300 per person per day. However, I suspect ones in Greece may go even lower. This is because Greece is suffering from serious domestic withdrawals while the primary concern in Cyprus was foreign outflows.
  • Foreign transfer controls: The aim here would be to limit the amount that people can transfer abroad from Greece in one go and also over a set period. Obviously some transfers are needed for businesses to function so there would need to be a process by which businesses related (and other verified) transactions could still go through.
  • Time requirements or taxes: Other options or versions of the above include taxing certain withdrawals or foreign transactions heavily. This has the advantage of potentially creating a revenue stream for the government, though it may come at a very high cost. The government could also decree time limits on certain deposits or investments in an attempt to limit withdrawals indirectly.
  • Physical controls: Obviously with free movement within the EU it would be quite easy for people to move large amounts of cash or assets across borders. As such there will need to be checks and limits on the amount of cash people can take abroad with them. This may also have to extend to assets. For example, someone could purchase a car and then try and drive across a border and sell it on. This is tricky to police but some attempts may well be made.

Harvard economist Kenneth Rogoff (who has an opinion or two about high debt and economic growth) echoes the above, telling NZZ am Sonntag that capial controls in Greece are the only alternative (via Bloomberg):

“I see only one possibility: Greece should introduce capital controls for an extended period,” Harvard University economics professor Kenneth Rogoff tells NZZ am Sonntag in interview.

We assume no spreadsheet errors were made on the way to that conclusion.

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If Athens does decide to take the plunge and set about the 'Cyprus'ing' of Greek depositors, the real problem may not be how to implement capital controls, but rather how to lift them, especially considering Greece is doomed to a life of debt servitude until at least 2057. On that note, we'll close with the following warning from Reykjavik University economist Friðrik Már Baldursson: 

“It is easier to impose the controls than to lift them. The government needs to convince depositors that they can bring their money back into the banks as controls will not be imposed again. But credibility can disappear very quickly and take a lot of time to be regained.”