Thursday, March 19, 2015

Will Greece Get Capital Controls?

The EMU imposed capital controls on Cyprus after their financial crisis in 2013. Will Greece get capital controls when (and if) it becomes cleared that their crisis is only on hold?

But Cyprus' problem was different. It was mostly about the Cypriot government letting its banking sector bloat up with presumably ill-gotten Russian deposits, and then being too small to act as a lender of last resort when those banks became insolvent.

Greece ... has bigger problems. Recall the post from earlier this semester: people are starting to use the word "failed state" when referring to Greece. This is a word we usually reserve for places like Somalia.

Even so, if the money starts flowing out again, capital controls may be coming. The problem is that half of the assets of Greece's banking system are IOU's issued by the Greek government that it promises to pay out of tax revenues. But it's having trouble collecting taxes.

What we need to pay attention to over the next few months is the decisions that the European Central Bank (ECB) makes regarding Emergency Liquidity Assistance (ELA). If they are tight with that, then the government of Greece may need to impose capital controls.

Also keep your ears open for any data about capital flows out of Greece.
This chart is poorly explained: what bears watching is the bars and the scale on the right. I'm eyeballing that and seeing €4B in December, €13B in January, and €4B in February. Does that mean that the smart money has already left, or that Greeks were holding out hope in February that Syriza might be able to make a better deal?

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