Monday, 10 August 2015

Capital controls (Kεφαλαιακοί περιορισμοί)

The imposition of capital controls (CC) prior to the Greek referendum is regarded, generally speaking, by western commentators, as disastrous for the Greek economy. I think that shows how little global economic experts understood how money worked in Greece up until CC were imposed. They only realised what was happening now, post-CC. Capital controls are viewed as a sign of the degeneration of an economy. But Greece's economy had degenerated well before that, without any form of CC. So where was the harm in imposing CC?

Initially, CC harmed what was left of the economy because money could not be sent abroad to pay for merchandise and materials needed for industry. But in a cash based society like Greece, this was hardly an issue:
"Thousands of businesses have indeed been harmed but the type of business that has mainly evolved over the decades has been based on borrowing, low productivity and rampant tax evasion – something which needed to end."
It takes two to tango, it's not rocket science, and it certainly isn't just a Greek problem. Without CC, tax avoidance was rife. Prior to CC, Greek businesses were using cash in their business dealings, the perfect way for both sides of the transaction to avoid taxes and hide their activities.  But this isn't the reason why CC were imposed. The reason is a much more selfish one. Greeks brought the situation on them themselves by taking their money out of the bank, believing that the Greek government - whichever one it was, left right or centre, whether they voted it in or not - will fail, taking us out of the euro. While this was a real possibility given that the German FinMin Wolfgang Schaueble had had enough of Greece and had made this abundantly clear by the time of the referendum, Greeks never really estimated the potential dangers of taking their money out of the banks.

Overnight, Greeks could not take money out of the bank with the freedom that they once could. Very few people used cash cards for transactions and even fewer 'trusted' credit cards, because they were ignorant of how they worked. There was not even a transition period for the changeover. It just happened. Former Greek FinMIn, the flamboyant Yanis Varoufakis, insisted that Greece's creditors imposed CC on the country, but I think that's far-fetched - CC were needed in Greece well before they were imposed. By the time of the referendum when CC were imposed, people had gotten to the stage of hiding their money 'under the mattress' so to speak:
"The introduction of capital controls, for example, resulted in a huge increase in the use of plastic money, with more than a million new cards being issued within a month and a doubling of the number of such transactions. At the same time, the cap on withdrawals will see money that has been “mattressed” gradually being spent until the cash in circulation comes down to a fraction of what it is today."
When a friend abroad casually mentioned that he would be visiting Greece soon 'to inject some euros into the Greek economy', my husband responded by saying 'Don't worry, there are plenty of euros in Greek gardens':
"In a country where cash is king and undeclared transactions still make up about a quarter of the economy, about 1 million debit cards have been issued by banks since the government closed lenders for three weeks and imposed controls on euro bills. Emergency measures that some officials warned might spur the black market are showing signs of doing the opposite... Supermarket and gasoline sales paid by debit cards doubled in the wake of controls; usage in the countryside tripled... more buying and selling of goods and services goes through the books."
Much has been written about the negative aspects of capital controls, but the best source in my opinion is from the Greek bankers themselves, who write in Greek. Here is part of an article written by a Greek banker (he works in Eurobank) which appeared in this Sunday's print edition of the respected Greek newspaper To Vima, and has now also been published on the web. It's worth noting what is being discussed in Greek, a language generally unavailable to the English-speaking world:
"The imposition of capital controls found a large number of Greek citizens unprepared and therefore "excluded" from a number of banking transactions, first and foremost the inability to use cash to service their everyday obligations. Precisely this is why from the very first days of enforcing capital controls, banks were barraged by debit card requests and accessibility to alternative (electronic and telephone) trading networks.
"What troubled the domestic banking system for many years and which the banks was trying to promote, on the basis of international experience, simply occurred by necessity, abruptly and without any adjustment period. It is indicative that in Greece card payments in all forms represented only 6% of total payments in the country, one of the lowest rates in Europe, compared with 24% which is the European average and 42% are in Denmark.
"International experience also certifies the inverse relationship between the informal economy and the use of electronic money. It is indicative that in northern European countries (eg Denmark, Sweden), where the use of electronic money is highly developed, it has almost eliminated the informal economy, in contrast with countries of the South or the former Eastern bloc where cash is more common and there is a flourishing underground economy and tax evasion.
"Despite the initial shock caused in our country, capital controls can gradually change consumer behavior and habits and form the basis of a wider reform of a part of the banking and trade sector, mainly in the behavior of citizens in terms of their obligations to the State. It is obvious that every online transaction leaves behind a tax footprint, thus facilitating both the attempt to increase tax revenues and enhance transparency, actively and effectively limiting tax evasion.
"This change has occurred since the imposition of capital restrictions to date, certified by the available evidence from Greek banks, according to which there was a significant increase in demand for debit cards, which surpassed 1 million. Before capital restrictions, on average fewer than 100,000 cards per month were issued. In the same period more than double new codes were issued for the use electronic banking. With a daily limit on withdrawals remaining at €60, consumers increasingly use their debit card for daily transactions, so that the turnover of debit cards was higher for the first time in July than that of  credit cards, following the trend prevailing in the rest of the European Union. In particular, the turnover of debit card acceptance terminals (POS) more than doubled compared to the previous period. The increased use is observed in both the existing and the new-card customers, who replaced cash with cards as a payment instrument for their daily transactions (such as supermarkets, petrol stations etc.).
"Furthermore, it is noteworthy that the card acceptance environment varies. Companies and services, several of which were perfectly set up for fraudulent tax evasion, have expressed the intention to use card payment options at points of sale. The demand is great even from less traditional sectors such as small businesses and individual professionals (eg, pharmacists, doctors, dental clinics). A large number of fast food services (cafes, etc.) that do not accept cards are now asking to install contactless payment terminals. Many taxi unions also want to equip drivers with portable card acceptance terminals (mPOS). It is estimated that in the next two years the installed base card acceptance terminals (POS) in the country will reach about 400,000 (more than double from the current number of 150,000).
"These developments are expected to contribute significantly to efforts to reduce operating costs of banks, by the transfer of transactions from the bank branches to alternative distribution channels, ie ATM, POS and e-Banking. But the most significant development in the expansion of electronic transactions is the positive contribution to the economy and the strengthening of the country's finances to combat the underground economy and tax evasion."
What is going to happen to people who are hiding their money in the garden or under the mattress? A law is being proposed that will allow people to bring back their money to the bank, with a 45% tax slapped on it if they cannot prove where the money came from (ie whether it was legally earned or not). That of course will deter even the most patriotic among the cash hoarders. Suitcases are being checked at airports, to ensure people are not taking money out of the country. So in effect, what is left for them now is to use that cash up - and eventually it will come back into the system.

Capital controls sounded nasty to begin with, but that's what's propping up the banks now. For a state full of cash hoarders, this is probably the best way to stabilise the economy. Even some state benefits are being paid out by prepaid cards - if you are too poor to eat, this is a good way to make sure you will spend your money on food, and not, say, cigarettes. Desperate times call for desperate measures.

When CC were announced, my husband was furious with me. "It's all your fault," he cried, "you never once went to the ATM to withdraw some cash! Now we're gonna lose all our money!" So why didn't he go to the ATMs to withdraw cash? See above discussion...

I never believed any of the eurosceptic nonsense that was being blasted by the right wing media, especially on TV. I sincerely thank the Greek private tv channels for their fear-mongering referendum propaganda (that we would be kicked out of the euro, and eventually out of Europe). They consolidated my big fat Greek OXI vote, unwittingly undermining the conservative vote that they thought they were supporting. Instead of hoarding cash, I checked my kitchen larders and stocked up on staples. I reckon I'm fully stocked on rice, beans and pasta until Christmas.

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