Greece’s headache: How to lift the capital controls?

Updated 26 July 2015
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Greece’s headache: How to lift the capital controls?

ATHENS: It is just the headache Greece’s government does not need right now: How can it loosen the capital controls that are shielding its banks, but strangling the rest of the economy?
For the past month, Greece has been financially cut off from the rest of the world. It is almost impossible for most Greeks to take money out of the country, thanks to a raft of capital control measures put in place on June 29 amid fears of a catastrophic bank run.
For companies, the capital controls have meant waiting for a government commission to sign off on large bills owed to foreign firms — a process that has slowed payments so much that distrustful suppliers started asking to be paid in advance.
Bank of Greece chief Yannis Stournaras on Friday loosened the restrictions to allow banks to greenlight companies’ foreign payments up to 100,000 euros ($110,000).
But people remain unable to open new foreign bank accounts, buy shares, or transfer large sums of money. Athens is tolerating two main exceptions to the rules: Greek students abroad can receive 5,000 euros per quarter, while citizens having medical treatment in other countries can receive up to 2,000 euros.
Cash withdrawals were limited to 60 euros ($65) per day after Greeks emptied ATMs, worried for the safety of their savings.
Greek Economy Minister Giorgos Stathakis warned on July 12 that it could be “several months” before it is deemed safe to lift the measures completely.
Announced in the throes of the crisis, when Greece appeared to be teetering on the brink of a chaotic eurozone exit, the capital controls were brought in with just one immediate concern in mind: protect the banks.
Some 40 billion euros have left the banks’ coffers since December. As the world waits to see whether Greece and its creditors can hammer out a bailout worth up to 86 billion euros ($96 billion), staving off a panicked outpouring of the country’s cash remains a paramount concern.
According to Diego Iscaro, an economist at consultancy IHS, the problem with capital controls is that they are “easy to implement but very difficult to lift.”
Or as Moody’s analyst Dietmar Hornung put it: “Confidence (in the banks) is lost quickly, but it takes time to restore it.”
Elsewhere in Europe, Iceland is a perfect example of this: the country is only now beginning to lift capital controls that have been in place since 2008.
Cyprus, too, has only just lifted the restrictions introduced in 2013 when, nearly bankrupt, it was forced to impose a so-called “bail-in,” which saw people with large bank deposits lose a hefty chunk of their savings.
“Even Cyprus — with a government resolutely engaged in the reforms, a process which has gone well — took two years to come out of them,” said Frederik Ducrozet, an economist at Credit Agricole.
In Greece’s case, the negotiations have been fraught to say the least, and several of its eurozone partners (and creditors) have openly cast doubt on the government’s ability to stick to its promises.
Many Greeks fear that they too will be forced to endure a bail-in — but analysts say such a move would be much more painful in Greece.
Cyprus’ bail-in was “easier politically” because it largely affected foreigners who had parked large sums in the tax haven, according to Ducrozet.
“The situation in Greece is very different,” the economist Frances Coppola wrote on her blog. “Most large depositors have removed their money already. The remaining uninsured deposits — about 30 percent of the deposit base — are mainly the working capital of Greek businesses.”
She added: “Bailing these in would be far more destructive for the Greek economy than the bail-in of large depositors was for Cyprus.”
The Greek economy is already forecast to contract by three percent this year by the Standard and Poor’s rating agency, but extended capital controls and a big bail-in could constrict activity even further.
In any case, Greece’s badly-weakened banks must be shored up before the capital controls can be lifted.
That will mean waiting for the European Central Bank to carry out stress tests and then for them to be recapitalized through the new aid plan, which has yet to be finalized.
The initial agreement reached between Greece and its creditors floats a 25 billion euro top-up for the banks. Ducrozet predicted a figure of “between 10 and 20 billion (euros), with a ‘bail-in’.”
Once the recapitalization is complete — or even before, if the ECB is satisfied with the progress of the talks — Athens will be able to raise the limits on cash withdrawals, and re-authorize more transfers to banks abroad.


UK core pay growth strongest in nearly 11 years, but jobs growth slows

Data showed the unemployment rate remained at 3.8 percent as expected. (Shutterstock)
Updated 16 July 2019
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UK core pay growth strongest in nearly 11 years, but jobs growth slows

  • Core earnings have increased by 3.6 percent annually, beating the median forecast of 3.5 percent
  • The unemployment rate fell by 51,000 to just under 1.3 million

LONDON: British wages, excluding bonuses, rose at their fastest pace in more than a decade in the three months to May, official data showed, but there were some signs that the labor market might be weakening. Core earnings rose by an annual 3.6 percent, beating the median forecast of 3.5 percent in a Reuters poll of economists. Including bonuses, pay growth also picked up to 3.4 percent from 3.2 percent, stronger than the 3.1 percent forecast in the poll. Britain’s labor market has been a silver lining for the economy since the Brexit vote in June 2016, something many economists attribute to employers preferring to hire workers that they can later lay off over making longer-term commitments to investment. The pick-up in pay has been noted by the Bank of England which says it might need to raise interest rates in response, assuming Britain can avoid a no-deal Brexit. Tuesday’s data showed the unemployment rate remained at 3.8 percent as expected, its joint-lowest since the three months to January 1975. The number of people out of work fell by 51,000 to just under 1.3 million. But the growth in employment slowed to 28,000, the weakest increase since the three months to August last year and vacancies fell to their lowest level in more than a year. Some recent surveys of companies have suggested employers are turning more cautious about hiring as Britain approaches its new Brexit deadline of Oct. 31. Both the contenders to be prime minister say they would leave the EU without a transition deal if necessary. A survey published last week showed that companies were more worried about Brexit than at any time since the decision to leave the European Union and they planned to reduce investment and hiring. “The labor market continues to be strong,” ONS statistician Matt Hughes said. “Regular pay is growing at its fastest rate for nearly 11 years in cash terms and its quickest for over three years after taking account of inflation.” The BoE said in May it expected wage growth of 3 percent at the end of this year.