LUXEMBOURG—The last time Greece was facing a hard deadline to secure a deal with its bailout creditors, in February, it agreed to one only when it feared a worst case scenario—a run on the country’s banks.
Fast forward four months, and the situation is looking dire once again. With no sign of a breakthrough in Greece’s talks with its creditors to avoid a default on June 30, the incentive is growing for Greeks to pull their cash out of the banks.
Why leave euros in a bank when—should Greece default and drop out of the currency bloc—it could be converted with one strike of a keyboard into a new, weaker currency?
“Everyone is worried about their deposits,” said Alexandros Papandreou, a 66-year-old pensioner, as he withdraws money from a cash machine in Athens.
Among the myriad of threats facing Greece, a bank run is perhaps the biggest as it would trigger a series of events that could call time on the country’s 13-year membership of the euro.
That’s why there’s growing speculation that Greece, with or without a deal, could have to do what’s normally reserved for the most extreme financial turmoil—clamp down on money transfer and withdrawals to pre-empt a bank run. The government could in theory put limits on the amount of cash an individual can withdraw, restrict electronic transfers of money outside Greece, and on how much someone can carry over borders.
“Capital controls may well be a milestone toward a deal or an exit” from the euro, said Guy Foster, head of research at investment management company Brewin Dolphin.
Such limits could keep the banks stable, but would crimp the economy. And if history proves anything, they can last a long time—Iceland is only now discussing how to relax its emergency measures, seven years after imposing them.
Warning Signs
Greece’s banks are already in a perilous state. The last available figures show deposits in Greece hit their lowest level in more than a decade in April. Since then, doubts over Greece’s financial future have intensified significantly.
The scale of unease over Greece’s banks is also evident in the fact that the ECB has been increasing the amount of emergency credit it allows Greek banks to draw on to remain afloat.
