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Capital Controls Coming

by John Rubino on June 20, 2012 · 15 comments

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. Planning 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.

{ 11 comments… read them below or add one }

Sue June 21, 2012 at 2:51 am

The Fed sez: “twist again, like we did last summer. Oh yeah, twist again, like we did last year.”

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Daniel Ameduri June 21, 2012 at 4:56 am

Great commentary, very scary to think about this, especially since it is in our very NEAR future.

Always love checking this site and commentary.

-Dan-

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bob D June 21, 2012 at 5:52 am

the problem is the eurounion charter and euro currency and debt were
at the onset written by the same dummies who now can not figure out
how to fix their mess, too bad

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Jason Emery June 21, 2012 at 10:07 pm

Hi bob D–Wasn’t it Goldman Sachs that designed Greece’s portfolio? You know, the one that says they qualify for EU membership, since all their debt is off balance sheet, lol.

I don’t see the point of a daily limit on withdrawals. Folks will just stop depositing money.

Capital controls are like FDIC insurance in reverse. We guarantee that you don’t get your money. How do you like us now?

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Daniel de Paris June 21, 2012 at 6:16 am

Hi John,

Though I adhere to the point that “capital control” scheme are now in view, I still find it difficult to consider massive flows of money pouring out of the banking system here in Europe.

Why? For some very basic reasons:

1- language and cultural barriers, how stupid they might feel, are quite strong especially for those who have money (the oldest), is that easy for a US citizen to open an account in non-English-speaking place? Do not expect the Europeans to be any different,

2- age issue, most of those with money are old, their behaviour does not match Christopher Columbus, check your relatives,

Those who could move and would their money have already made it IMHO.

In the past, the real alternative for people in Europe was gold. Yes just plain gold. But here as well, in spite of a few noticeable exceptions, this currency evasion has been lost in translation.

What is left is most certainly an increase in 500-Euros-notes mattress-stuffing. But IMHO as far as in Southern Europe is concerned that’s only an incremental change on the previous behaviour.

The real issue here is neither Greece nor Spain but Italy households and, in case of a nightmare, French ones.

I still do not buy into the scenario for those countries. Since the money is generally stuck in relatively illiquid instruments. Banks will have time to adjust. And central bankers even more so.

In view of the difficulties I ran into when explaining the crisis starting 2006 (yes 2006), I can guarantee that money is certainly dumber or more patriotic than most would tend to believe.

Not everyone here is a London City or WS banker. Even among financiers and entrepreneurs… By the way I would certainly SEND one single buck over the Channel and the pond. Those who did here – yes they were quite a bunch of them – were paid back for their trust in 2007 and 2008.

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Joe-Joe June 21, 2012 at 7:07 am

Giving credit to Sue, yes that song is quite appropiate at this time….while the FED wants to print money like toilet paper and make it look like Europe is sinking (a distraction?), all we can do is prepare and be happy.

http://www.coolbuzz.org/entry/flaunt-your-riches-with-million-dollar-toilet-paper/
(our modern day medium of exchange).

http://www.youtube.com/watch?v=zw03WVHVCuU&feature=related

And here’s the song Sue refers to (above). Although not the original version, I thought this one was perfect at 0:25 – “Do you remember when things were really hummin’?” That line is perfect! It makes me think of when the economy was rolling along like a freight train (ie – during the housing bubble). Things aren’t really hummin’ now, but we can still sing the Twist!

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paper is poverty June 21, 2012 at 11:10 pm

Here’s a big reason to take money out of banks: 30,000 customers of an Italian bank called BNI have had their accounts frozen for one month, and without any real notice (bit.ly/LOOmmi). This includes ATM, checks, debit & credit cards, etc. People thought BNI was safe because it had been taken over by the central bank, but it was the Bank of Italy itself that made this decision and froze these people out. Really bad decision– what are they going to fix in a month? And the liabilities involved in a mere 30,000 accounts have to be smaller than the amount of cash which will now be sucked out of the Italian banking system in response to this story.

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Bruce C. June 22, 2012 at 1:00 am

We shall see how people respond to the BNI situation. That story has been out for a while and I haven’t read of much reaction so far. I hope your right, but I suspect it’s going to be about as seditious as the MF Global heist. I guess you agree with JR that, “It’s not a big intuitive leap…” for most people to connect the dots.

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paper is poverty June 23, 2012 at 10:56 pm

Just an update — Zero Hedge is running a story on a major UK bank where people have been unable to access funds for days now: http://bit.ly/LpT2hz. I also failed to mention that there were worries about Banque Postale in France a week back: http://bit.ly/MFKAa3 .

I definitely think the dots are connected. Once one rule or expectation is broken, the next one is easier to break.

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Steven Goodwin June 22, 2012 at 3:46 pm

>> Meanwhile, talking about capital controls risks making them a self-fulfilling prophecy

It’s a shame when a critical component of a system is dishonesty. Maybe it’s time for a new system where transparency isn’t toxic. I’m resonating to an idea I read recently where banks should just become public utilities rather than casinos – store the money safely and make loans to individuals and businesses, and whatever profit is leftover after paying expenses goes to the depositors (shareholders) as interest. Under such a simplified charter, banks are not ALLOWED to pursue anything risky since that endangers the deposits.

If you want to do anything fancy and risky, then you open up a different kind of brokerage house to do it that does NOT have the government on tap to cover your mistakes.

Steven in Dallas

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Bruce C. June 22, 2012 at 3:48 pm

Not only does “talking about capital controls risk making them a self-fulfilling prophecy,” thinking about them also risks making one’s self paranoid.

If A is possible and A could lead to B which could lead to C does that mean that if A happens then B and C are likely to follow? Is history the best guide to use? What if circumstances are only partially similar? What if circumstances are unprecedented? Should one assume that societies/politicians never learn or change? Can any one or any thing be trusted in desperate times?

I don’t disagree that things could get dire enough in the US that the government begins outright confiscation of citizen’s assets but I wonder if anywhere else would be any safer if that were to happen. It has been said that when the US sneezes the rest of the world catches a cold, but maybe that isn’t as true any more since the development of the global economy. Then again, maybe it is still true. Judging by the actions of the financial markets the US dollar and our financial and political institutions are still considered the safest haven. So if/when the US starts to buckle where else would be any better? Singapore?, Hong Kong? Canada? Australia? Switzerland? one of the BRICs? Or would some little obscure country be better, like one of the Caribbean islands (Cuba maybe?) I really wonder. Seriously. My point is that it is a lot of trouble to diversify assets geographically and it’s not clear to me that it would ultimately be worth it or even effective. Not only that, even if efforts like that would be necessary to retain or increase one’s wealth, what kind of mass circumstances would exist in the aftermath? What practical good is there in being the only guy/gal/family in the neighborhood with any money left? I’m not so sure it would be that useful, at least in the short term. Is this sounding paranoid?

Personally, I think just having wealth in hard assets (like precious metals and land/RE) and not in fiat/paper form is the most practical way to diversify, even if it is all in one country. Maybe if I didn’t live in the US I’d want to have an account here, but I’m not sure anywhere else would be any safer if things get that bad.

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