It is a headache Greece’s government does not need right now – how can it loosen the capital controls that are shielding its banks, but strangling the rest of the economy?
For the past month, Greece has been financially cut off from the rest of the world. It is almost impossible for most Greeks to take money out of the country, thanks to a raft of capital control measures put in place on 29 June amid fears of a catastrophic bank run.
For companies, the capital controls have meant waiting for a government commission to sign off on large bills owed to foreign firms – a process that has slowed payments so much that distrustful suppliers started asking to be paid in advance.
Bank of Greece chief Yannis Stournaras on Friday loosened the restrictions to allow banks to greenlight companies’ foreign payments up to €100,000.
But people remain unable to open new foreign bank accounts, buy shares, or transfer large sums of money. Athens is tolerating two main exceptions to the rules: Greek students abroad can receive €5,000 per quarter, while citizens having medical treatment in other countries can receive up to €2,000.
Cash withdrawals were limited to €60 per day after Greeks emptied ATMs, worried for the safety of their savings.
Greek Economy Minister Giorgos Stathakis warned on 12 July that it could be “several months” before it is deemed safe to lift the measures completely.
Announced in the throes of the crisis, when Greece appeared to be teetering on the brink of a chaotic eurozone exit, the capital controls were brought in with just one immediate concern in mind: protect the banks.
Some €40 billion have left the banks’ coffers since December. As the world waits to see whether Greece and its creditors can hammer out a bailout worth up to €86 billion, staving off a panicked outpouring of the country’s cash remains a paramount concern.
A ‘bail-in’ for Greece?
According to Diego Iscaro, an economist at consultancy IHS, the problem with capital controls is that they are “easy to implement but very difficult to lift”.
Or as Moody’s analyst Dietmar Hornung put it, “confidence (in the banks) is lost quickly, but it takes time to restore it.”
Elsewhere in Europe, Iceland is a perfect example of this. The country is only now beginning to lift capital controls that have been in place since 2008.
Cyprus, too, has only just lifted the restrictions introduced in 2013 when, nearly bankrupt, it was forced to impose a so-called “bail-in”, which saw people with large bank deposits lose a hefty chunk of their savings.
“Even Cyprus – with a government resolutely engaged in the reforms, a process which has gone well – took two years to come out of them,” said Frederik Ducrozet, an economist at Crédit Agricole.
In Greece’s case, the negotiations have been fraught to say the least, and several of its eurozone partners (and creditors) have openly cast doubt on the government’s ability to stick to its promises.
Many Greeks fear that they too will be forced to endure a bail-in – but analysts say such a move would be much more painful in Greece.
Cyprus’ bail-in was “easier politically” because it largely affected foreigners who had parked large sums in the tax haven, according to Ducrozet.
“The situation in Greece is very different,” the economist Frances Coppola wrote on her blog. “Most large depositors have removed their money already. The remaining uninsured deposits – about 30% of the deposit base – are mainly the working capital of Greek businesses.”
She added, “Bailing these in would be far more destructive for the Greek economy than the bail-in of large depositors was for Cyprus.”
The Greek economy is already forecast to contract by 3% this year by the Standard and Poor’s rating agency, but extended capital controls and a big bail-in could constrict activity even further.
In any case, Greece’s badly-weakened banks must be shored up before the capital controls can be lifted.
That will mean waiting for the European Central Bank to carry out stress tests and then for them to be recapitalised through the new aid plan, which has yet to be finalised.
The initial agreement reached between Greece and its creditors floats a €25 billion top-up for the banks. Ducrozet predicted a figure of “between €10 and €20 billion, with a ‘bail-in’.”
Once the recapitalisation is complete – or even before, if the ECB is satisfied with the progress of the talks – Athens will be able to raise the limits on cash withdrawals, and re-authorise more transfers to banks abroad.
Eurozone leaders reached an agreement on a programme to save Greece from bankruptcy after 17-hour talks on 13 July.
If approved, this will be the third rescue programme for Greece in five years. It will be managed by the European Stability Mechanism (ESM), the eurozone permanent crisis resolution fund that was initially set up five years ago in an effort to save Athens from bankruptcy.
Here is a look at what Greece must do:
- request continued support from the International Monetary Fund after its current IMF program expires in early 2016
- streamline consumer tax and broaden the tax base to increase revenue. Laws on this are due by Wednesday
- make multiple reforms to the pension system to make it financially viable. Initial reforms are due by Wednesday, others by October
- safeguard the independence of the country's statistics agency
- introduce laws by Wednesday that would ensure "quasi-automatic spending cuts" if the government misses its budget surplus targets
- overhaul the civil justice system by 22 July to make it more efficient and reduce costs
- carry out product market reforms that include allowing stores to open on Sundays, broadening sales periods, opening up pharmacy ownership, reforming the bakeries and milk market and opening up closed and protected professions, including ferry transport
- privatise the electricity transmission network operator unless alternative measures with the same effect can be found
- overhaul the labour market. This includes reviewing collective bargaining, industrial action and collective dismissal regulations
- tackle banks' non-performing loans and strengthen bank governance
- significantly increase the privatization program, transferring €50 billion worth of Greek assets to an independent fund, based in Greece, to carry out the privatisations
- modernise, strengthen and reduce the costs of Greek administration, with a first proposal to be provided by 20 July
- allow members of the three institutions overseeing Greece’s reforms - the European Central Bank, IMF and European Commission, previously known as the 'troika" - to return to Athens. The government must consult with the institutions on all relevant draft legislation before submitting it to public consultation or to parliament
- reexamine, with a view to amend, legislation passed in the last six months that is deemed to have backtracked on previous bailout commitments.