Monetary controls in Greece squeeze consumers, businesses

The bank closings and restrictions on money transfers that the Greek government imposed Sunday are the financial equivalent of a tourniquet. The measures may stop the bleeding, but they are hardly a cure and could do more harm than good.

By limiting customer withdrawals to 60 euros ($67) a day and imposing other restrictions on payments and transfers abroad, the government will slow an exodus of money that threatened to ruin Greek banks. But the restrictions will severely impair the functioning of the Greek economy, which is in shambles after five years of crisis.

Greeks may face shortages of money to buy things in stores, potentially driving even more shopkeepers out of business. Foreign suppliers are likely to demand cash from Greek companies, which will be hard pressed to come up with the money.

Some analysts and investors say the restrictions on money transfers put Greece on a slippery slope that will lead to its exit from the eurozone and the reintroduction of its former currency, the drachma.

“While you’ve got no payment system, businesses are going to struggle badly,” said Gabriel Sterne, head of Global Macro Research at Oxford Economics in London, who estimates that gross domestic product could decline 10 percent. “My view is, you head toward the exit faster than anyone imagines.”

Miltiades Macrygiannis, proprietor of a small antiques store in Athens, said Monday that like most business owners, he could not get the cash he needed to replenish his stock now that cash controls were in effect. Partly as a result, he said he planned to reluctantly vote in favor of accepting conditions demanded by Greece’s creditors in a national referendum on Sunday.

A yes vote is preferable among two bad choices, he said. “I wouldn’t imagine, even as a nightmare, the scenario of going back to the drachma,” Macrygiannis said, surrounded by hanging lamps, carved mirrors, old worry beads and objects intended to ward away evil. “It would take 10 years to get us back on our feet again.”

The Greek government promised that banks would reopen next Tuesday. But many analysts and investors are skeptical. Once in place, controls on the movement of capital usually take years to unwind. Cyprus removed the last of its capital controls in April, two years after they were imposed.

And unlike Greece, Cyprus had a recovery program that was supported by a majority of voters and approved by its creditors, who provided financial support.

“No one will help Greece,” said Wilbur L. Ross Jr., a U.S. investor who owns a stake in Eurobank Ergasias, the third-largest bank in Greece.

“The country that brought us democracy may now take itself into chaos,” he said in an email.

Government officials estimate that about 1.3 billion euros of cash is available in the system that exists largely to satisfy withdrawals from automated teller machines. That is a small amount of cash to support a 179 billion euro economy for a week.

Greek bankers note that many Greeks have foreign bank cards that are exempt from the controls. Some worry that the combination of unlimited foreign card withdrawals along with 60 euro withdrawals by Greeks will soon exceed the available cash.

In that case, Greek banks could literally run out of money.

Pension payments are exempt from the restrictions, but the government may not have the money to pay them. The bulk of about 2.4 billion euros in pension and wage payments was disbursed last week, but some smaller pension payments that are due this week that could be problematic.

“I wouldn’t be surprised if some government pension funds come up short by about 100 million euros or so,” said one senior finance official who was not authorized to speak publicly.

The European Central Bank forced Greece to impose controls when it decided Sunday to cap the amount of emergency credit available to Greek banks at 89 billion euros. Most if not all of that money had already been used by the banks to fill shortfalls created by depositors who shipped their money abroad. Controls were necessary to keep depositors from trying to take out even more money that the banks did not have.

Corporate executives said many companies had foreseen such an outcome and made preparations. If so, the effect of the controls could be less drastic than feared.

An executive at one of Greece’s larger exporters said he removed most of the money from his company’s domestic bank account a few months ago and transferred it to a German bank.

The money is crucial to the company’s survival, allowing it to purchase imported raw materials used to manufacture its exports, and the executive did not want to risk having the money in a Greek bank.

“It was just too risky for us,” said the executive, who did not want to disclose his identity out of fear that the government would come after his corporate savings.

Greece’s shipping industry decoupled from the Greek economy long ago and would not be drastically affected, said Basil M. Karatzas, chief executive of Karatzas Marine Advisors, a consultancy in New York.

“Most of these companies and their bank accounts are based overseas, and the currency of the shipping industry is the U.S. dollar,” Karatzas said in an email. “Thus what is happening in Greece has minimal direct impact.”

Likewise, many ordinary Greeks are thought to have been hoarding cash as it became ever clearer that the left-wing Greek government would not be able to reach an agreement to unlock aid from its main creditors, the European Union and International Monetary Fund.

Spyros Pagratis, an economist at the University of Athens, estimates that about 20 billion euros in cash is stuffed in closets and drawers throughout Greece. That is part of the 40 billion euros that has exited the banking system in the past six months.

So he sees no immediate problem in terms of Greeks having cash at hand now that the banks are closed.

“The problem,” he said, “is that no one is putting any of this cash into action - everyone is hoarding liquidity.”

And in an economy that has largely become dependent on cash transactions, this spending strike can have dire consequences. It’s not just that people are not buying discretionary items that might catch their eye in a store window. They may also decide that it’s not worth paying taxes to the government or interest on their loans - even if they have the money to do so.

Pagratis pointed out that problem loans in Greece were 100 billion euros and rising, a sum equal to 55 percent of the size of the economy. Greek banks may have recently passed Europewide stress tests, but bankers and analysts here say that in the six months or so since the new Syriza government has been in power, loan portfolios at banks have been deteriorating.

After all, if a bank is closed for a week, the motivation for a customer to keep up with interest payments on a credit card or mortgage may not be very strong.

“There is an incentive not to pay,” Pagratis said.

This story was originally published June 29, 2015 at 3:32 AM.