Europe’s Capital-Controls Expert Warns Greece: Expect Pain Ahead

Former Governor of the Central Bank of Cyprus, Panicos Demetriade.

Photographer: Petros Karadjias/AP Photo

Europe’s expert on capital controls has a warning for Greece: It’s going to hurt.

The former Governor of the Central Bank of Cyprus, Panicos Demetriades, the only euro-area monetary official ever to have to introduced limits on cash transfers, says they’re more likely to deepen the country’s economy pain.

Without a comprehensive bailout plan in place, curbs on bank withdrawals will “erode the ability of business to carry out normal day-to-day transactions” and amount to a long-lasting tourniquet on commerce, Demetriades, now a professor at the University of Leicester in the U.K., said in an interview.

European Central Bank policy makers are convening almost daily to discuss liquidity supply to Greek banks, with customers withdrawing cash in droves amid the uncertainty over the country’s place in the currency union. Greece is at risk of following Cyprus as the second euro nation to introduce the desperate measures next week. Its bailout deal expires June 30 and talks on a new agreement have been deadlocked for months.

“The danger as I see it with Greece is that if they introduce it now, before there is an agreement, it’s not clear when and how they would be lifted,” Demetriades said. “If there’s no agreement, they may end up being permanent, and the precursor of Grexit.”

Cyprus Experience

In a 2013 rescue that saw bank accounts raided and the country’s second-largest lender shut, Cyprus initially prohibited withdrawals of more than 300 euros ($340) per day and required approval of external transfers exceeding 5,000 euros.

The shock pushed the Greek-speaking island’s economy into a contraction of more than 5 percent.

“We very quickly ended up with a huge mountain of requests for approvals of transfers,” Demetriades said. “We had a committee in the central bank who were looking at all these cases, but there were thousands of them.”

Cyprus linked the gradual lifting of controls to fulfillment of goals in its rescue package and removed all restrictions in early 2015.

Yet if Greece needs to secure its bank deposits without a clear plan in place, it faces a much rougher ride, he said. While the wealthy find ways to dodge the rules, routine economic activity is paralyzed.

“Capital controls can’t work in the long run, because people will find a way around them,” he said. “People would bring forward purchases of large valuable items with which they would essentially evade the capital controls. I remember some of the transactions of our rich depositors, where they bought yachts or jets.”