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For the past
few months depositors have been emptying their Greek and Spanish bank
accounts and moving the funds to safer places like Germany and Switzerland.
This is not surprising. What is surprising is that anyone still has
accounts in Greek and Spanish banks.
This is a
trend with a limited lifespan. Either sentiment stabilizes and capital starts
flowing back into peripheral eurozone countries
(possible but unlikely), or the slow-motion bank run continues until the
Greek and Spanish banks are empty, or the trickle becomes a torrent as
everyone heads for the exits at once, thus crashing those countries' banking
systems.
In the second
and third scenarios, the result will be capital controls ranging from bank
closures (like FDR's 1933 bank holiday), to expropriation of bank accounts
(as when Argentina converted dollar-based accounts to pesos in 2002), to
restrictions on the movement of wealth across borders. Planing
for such capital controls is well under way:
Euro
zone discussed capital controls if Greek exits euro: sources
(Reuters) -
European finance officials have discussed limiting the size of withdrawals
from ATM machines, imposing border checks and introducing euro zone capital
controls as a worst-case scenario should Athens decide to leave the euro.
EU officials
have told Reuters the ideas are part of a range of contingency plans. They
emphasized that the discussions were merely about being prepared for any
eventuality rather than planning for something they expect to happen - no one
Reuters has spoken to expects Greece to leave the single currency area.
But with
increased political uncertainty in Greece following the inconclusive election
on May 6 and ahead of a second election on June 17, there is now an increased
need to have contingencies in place, the EU sources said.
The
discussions have taken place in conference calls over the past six weeks, as
concerns have grown that a radical-left coalition, SYRIZA, may win the second
election, increasing the risk that Greece could renege on its EU/IMF bailout
and therefore move closer to abandoning the currency.
No decisions
have been taken on the calls, but members of the Eurogroup
Working Group, which consists of euro zone deputy finance ministers and heads
of treasury departments, have discussed the options in some detail, the
sources said.
Belgium's
finance minister, Steve Vanackere, said at the end
of May that it was a function of each euro zone state to be prepared for
problems. These discussions have been in that vein, with the specific aim of
limiting a bank run or capital flight.
As well as
limiting cash withdrawals and imposing capital controls, they have discussed
the possibility of suspending the Schengen agreement, which allows for
visa-free travel among 26 countries, including most of the European Union.
"Contingency
planning is underway for a scenario under which Greece leaves," one of
the sources, who has been involved in the conference
calls, said. "Limited cash withdrawals from ATMs and limited movement of
capital have been considered and analyzed."
Some Thoughts
It looks like
Greece will be spared immediate capital controls by the formation of a new,
pro-euro government that will try to implement the existing austerity plan.
It will fail, but that failure won't be apparent for a while. In the
meantime, all eyes are on Spain, where borrowing costs are now around 7% for
ten-year paper. Like Greece, Spain probably can't become competitive through
austerity alone, but unlike Greece it's too big to bail out. So that's where
the next battle between reality and wishful thinking will be fought.
Meanwhile,
talking about capital controls risks making them a self-fulfilling prophecy,
since holders of Greek, Spanish, and Italian bank accounts who read the above
will now have an even more compelling reason to empty those accounts.
It's not a
big intuitive leap from a temporary freeze on ATM access to a permanent daily
limit on withdrawals. Or from Argentina converting dollar-based accounts into
pesos to the US converting IRAs full of gold mining stocks into portfolios of
treasury bonds. For investors, this means that it's possible to make exactly
the right asset allocation decisions and still lose because of government
confiscation. This new layer of complexity makes geographic diversification
even more crucial.
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