Is the Greek government working to save its banks at the expense of its people?
A tenuous deal has been struck between Greece and its Eurozone frenemies. Yet many in the economic and political communities do not believe Greece will be able to stick to the agreement. Greek citizens are only slightly more confident in their government.
The lack of cash available is deeply hurting the economy. Local business owners are unable to fill their shelves. Families cannot find or afford to provide for their children and elderly. Individuals are reluctant to part with the little cash they have in their wallets. The Greek economy is stalling and could collapse at the slightest disturbance.
Capital controls are a common means for a government to regulate the flow of money into and out of a country. Most governments place some degree of restrictions on capital, often in the form of transaction taxes or customs limits. Typically, capital controls only make headlines when a government is scrambling to stay solvent- like Greece.
On June 29, the Greek government imposed strict capital controls in order to ward of a bank run. The restrictions made it nearly impossible for the majority of the population to withdraw money. A small exception was made for elderly pensioners: they are allowed to take out $120 a week.
The restrictions also burdened companies dealing with foreign suppliers. Any bill would have to be signed off by a governmental commission before payment could be released. Naturally, few foreign firms were willing to put up with the process.
Now that a deal has been has been struck with Greece’s creditors, many expected it to lift the monetary restrictions placed on the public. It has not. Indeed, the latest reports suggest that the capital controls will stay in place for months to come. At least for ordinary people. For corporations, it’s a different story entirely.
On Friday, Bank of Greece chief Yannis Stournaras loosened the restrictions on banks, allowing companies to transfer up to $110,000 abroad to pay foreign firms.
However, ordinary Greek citizens are still prohibited from withdrawing more than $65 a day. Moreover, they are not allowed to transfer larger sums of money, buy shares, or open foreign bank accounts. The only exceptions are for students studying abroad (who can receive €5,000 per quarter) and citizens who are seeking medical treatment abroad (who can receive €2,000).
It is generally agreed that while capital controls are easy to put in place, they are near impossible to remove. For instance, look at Iceland or Cyprus. Both of these countries placed very strict capital controls on their populations in the early days of the European Crisis. It is only recently that the controls are slowly being lifted.
“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 Credit Agricole.
Standard & Poor, a credit rating agency, had initially forecast that the Greek economy would contract by three percent this year. Extended capital controls could constrict economic activity even more.