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What Would Greek Capital Controls Look Like?

The four-month standoff between Greece and its creditors over the terms of the country’s bailout has taken a toll on its lenders. With savers withdrawing bank deposits at a record pace and lenders relying on more than 80 billion euros ($88 billion) of Emergency Liquidity Assistance to survive, the European Central Bank’s continued help is key to Greek lenders. If the ECB’s Governing Council were to restrict ELA operations, Greece might have to impose capital controls -- essentially capping the amount of money people can access from banks.

Capital controls would have to be put in place by the government, and Greece has said it has no plans for such restrictions. Deutsche Bank last week gave a 40 percent chance of such measures being implemented.

Here are some answers to frequently asked questions, based on conversations with economists and analysts:

How would capital controls work?

They would hurt.

No one knows the specifics for Greece, but here’s what happened in Cyprus: ATM withdrawals were capped at 300 euros a person per day. Transfers of more than 5,000 euros abroad were subject to approval by a special committee. Companies needed documents for each payment order, with approvals for over 200,000 euros determined by available liquidity. Parents couldn’t send children studying abroad more than 5,000 euros a quarter. Cypriots traveling abroad could carry no more than 1,000 euros with them. Termination of fixed-term deposits was prohibited, while payments with credit and debit cards were capped at 5,000 euros. Checks couldn’t be cashed.

How would capital controls be put in place?

An element of surprise helps. Capital controls in Cyprus started with the imposition of a long bank holiday, between March 16 and March 28, 2013. The holiday gave the country time to negotiate an accord with euro-area member states and the International Monetary Fund. Banks re-opened with restrictions in place and a recapitalization plan for the country’s financial system, which included the imposition of losses on deposits.

How long can capital controls be in effect?

There’s no real limit. Cyprus kept controls in place for two years, even though they were supposed to be a temporary emergency measure. Limits on transactions gradually eased over the two-year period, before being lifted completely in April 2015. Experience from other countries, including Iceland, shows that once in place, they can only be lifted gradually, after a long period of time. Iceland’s government is expected to present a bill this week to lift capital controls implemented in 2008.

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What other impact would they have in Greece?

They would buy time. If imposed, they may give Greece breathing space to strike a deal with creditors over a bank holiday, albeit at a huge cost. The limit on corporate transactions and deposit withdrawals would hurt retail sales, tourism, industry, imports and virtually every other sector of economic activity.

What could trigger capital controls?

Much of the collateral that Greek banks have pledged against ELA is government-guaranteed bonds, and Greek sovereign notes, including treasury bills. A missed debt payment, or a breakdown in bailout talks, would probably lead euro-area central bank governors to conclude that these guarantees are no longer eligible for emergency cash, as the guarantor is not solvent. Alternatively, the ECB could impose a very high discount on the face value of Greek collateral, thus setting a hard cap on maximum potential ELA.

What happens following a missed payment?

Governors would probably give Greece a very short deadline to strike a deal with creditors and restore its solvency, and hence the solvency of its banks, like they did in Cyprus. Alternatively, the ECB’s Governing Council could decide to discontinue ELA immediately, thus forcing the immediate imposition of a prolonged bank holiday and capital controls.

Would Greece have other options?

Not really. The government could let the ELA limit be exhausted, in which case there would be no money left in the Greek financial system after a few days, with savers rushing to withdraw as much cash as they can, while they still can. A complete exhaustion of ELA would push Greece out of the euro area, as no economy can function without liquidity. Even if the government plans to leave the currency bloc, capital controls would still make sense, as they would freeze time until it manages to print a new currency, or a currency equivalent.

Are capital controls legal?

In very rare cases. While the free movement of capital is one of the “four basic freedoms” of the European Union, restrictions are possible under “strict conditions on grounds of public policy or public security.” The European Commission allowed Cyprus to do it, in the only instance on record, saying there was significant risk “of complete destabilization of the financial system.”

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