Greek Capital Controls Can Work If Fair, Iceland’s Expert SaysJeff Black and Brendan Greeley
Greece’s capital controls can help the economy recover and don’t have to be disruptive as long as they’re managed fairly, according to the governor of the only other central bank in Europe with such restrictions in place.
“It is very important that you have a kind of efficient government apparatus that puts the interests of everybody in view and is seen to be fair,” Central Bank of Iceland Governor Mar Gudmundsson said Friday in an interview with Bloomberg Television in Jackson Hole, Wyoming. While “you shouldn’t use them lightly, they can work -- they worked in our case.”
The Atlantic island nation is aiming to remove all restrictions on the movement of money by 2017, nine years after they were introduced after a banking collapse in October 2008. Greece, which teetered on the edge of a euro exit this summer after disagreeing with creditors over aid conditions, limits the amount of cash citizens can withdraw from their bank accounts.
“There are significant differences, because in Greece these are more controls on domestic residents taking out their money, whereas in our case we had very big bankruptcies of private banks,” Gudmundsson said. “We were dealing with an overhang of foreign claims on the Icelandic private sector of maybe half of our” gross domestic product, he said.
Greece became the second country in the euro area, after Cyprus, to introduce such curbs, even though in principle European law guarantees the free movement of capital. Cyprus ended its capital-control regime this year.
Gudmundsson said official attitudes on capital controls have changed completely, with creditor institutions such as the International Monetary Fund seeing them as a useful tool.
“It was easier in our case because we are an island, we’re a small place,” he said. “You have a few banks, and if they play along, then it works. And then it was supported by the population, because they knew the capital controls were imposed to avoid meltdown of the exchange rate, which would have had very detrimental effects on their living standards.”
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