Greece has closed its banks and instituted capital controls. The measures will remain in effect until at least July 6th, the day after a popular referendum on European bailout aid is due to take place.
Rather than agree to further austerity measures in exchange for an extension of financial aid from its international creditors, Prime Minister Alexis Tsipras surprised markets by putting the decision to a popular vote. Greece’s current bailout program expires tomorrow, when a 1.6 billion euro payment to the International Monetary Fund also comes due.
Stock markets across the globe fell on the news, and gold rose about 0.7%.
Bloomberg reports that Greece’s capital controls include:
- Banks are closed up to and including July 6.
- International payments and transfers are banned.
- Daily ATM withdrawals are limited to 60 euros ($67; £42).
Greek citizens have been lining up in staggering numbers to withdraw what little savings they can. The situation is reminiscent of the financial crisis in Cyprus two years ago, however, Greece’s situation is much different. As Gabriel Sterne of Oxford Economics put it:
The key point is that Cyprus’s were part of a cruel solution, while Greece’s would be part of a failure to agree on any sensible solution… Capital controls in Greece are failure epitomized.â€
Others compare the Greek situation to Argentina in 2002, when the South American country defaulted on $95 billion of debt. Ultimately, trust in the government collapsed when Argentina was forced to convert dollar-denominated deposits to pesos, slicing the value of those deposits by more than 66%.
Athanasios Orphanides, a former governor of Cyprus’s central bank and a professor at MIT, told Bloomberg:
Just like the South American nation before it dropped its peg, Greece doesn’t have the money it needs to spend and lacks the ability to print euros — making capital controls all but useless…â€
