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.
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.
The ECB could turn off that support if it thinks Greece is going bust. It would be under intense pressure to stop pumping money into a banking system that might collapse and take the ECB’s money with it.
Greek Finance Minister Yanis Varoufakis will be aware of those risks as he joins fellow eurozone finance ministers in Luxembourg Thursday—as he clearly was in February when he agreed to a four-month bailout extension.
Creditors are insisting Greece must make more budget cuts for more loans, but Greece is resisting and also wants a longer-term plan to lighten its swelling debt burden, which despite years of spending cuts and tax increases is equal to a staggering 180 percent or so of its annual GDP.
Few expect a breakthrough on Thursday. But that could change as Greece approaches a June 30 deadline, when it has a big payment to the International Monetary Fund to make. It is not expected to be able to afford it without more bailout loans.
Though imposing so-called capital controls is in theory illegal for a euro country, it’s been done once before: in Cyprus, in 2013.
In March of that year, the population of Cyprus was stunned when eurozone ministers at a late-night Friday meeting decided to raid bank deposits as part of a rescue of the country’s banking system. Amid fears of a bank run, the government shuttered them all for days. They were not reopened before authorities imposed harsh restrictions.
Initially, people could only take out a daily maximum of 300 euros ($336) cash from their accounts and couldn’t transfer money out of the country. Large business transactions involving money transfers abroad had to be strictly vetted.
It took two years before all restrictions were lifted.
“Imposing capital controls on Cypriot banks was certainly correct,” said Theodore Panayotou, director of the Cyprus International Institute of Management. They forestalled, he said, a possible “avalanche of outflows.”
Capital controls might keep the Greek financial system afloat while they last, but they would likely come at a steep economic cost.
In Cyprus, deposits are down 35 percent compared with before the crisis, but they’re still high enough for the banks to survive. And despite an acute recession, the Cypriot economy is now healing. The capital controls, it is argued, gave Cyprus breathing space.
Things would not necessarily work as well in Greece.
Eurozone states could try to prevent Greece legally from using capital controls unless it also makes the reforms it has so long resisted, said Jessica Hinds, economist at Capital Economics. And even if they allow the controls, she said creditors could in return demand even greater reform efforts, which the Greek government “is unlikely to swallow.”
Panayotou said he wouldn’t be surprised to have a “déjà vu” moment in the next few months if Greece’s doesn’t get a comprehensive deal.
Until then, the confusion surrounding the country’s situation is likely to only increase concern among Greeks.
“As the matter is presented by the government,” said Papandreou, the pensioner, “it is clear there is a problem.”