Here is an overview of the Greek situation, covering the decision to impose capital controls, some background on how capital controls work, and some of the potential outcomes of the crisis. Capital controls prevent capital flight. That is, everyone taking their money out of the banks and the country and therefore undermining the country’s financial institutions. This sounds like a reasonable policy, though one of the ironies is that once people think capital controls are going to be put in place, they have an extra incentive to take their money out of the bank fast so they don’t get caught. In the short term, they also reduce the money available for people to spend and therefore depress the economy further. In the long term, they can scare away future investment because potential financiers are afraid they will lose control of their funds once they invest in a country with a history of imposing capital controls. This is why the current global free-trade regime places so many restrictions on the use of capital controls. If investors feel secure, they will, in theory, put more money into the global economy thus spurring growth etc… etc… Nevertheless, there is considerable debate about whether it is better to break with the established economic wisdom when a country is faced with crippling debt as Greece is, or some other type of economic melt-down. Malaysia, for instance, used capital controls to help deal with the Asian financial crisis of the late 1990s.
“After bailout talks between the leftwing government and foreign lenders broke down at the weekend, the European Central Bank froze vital funding support to Greece’s banks, leaving Athens with little choice but to shut down the system to keep the banks from collapsing.”
“Banks will be closed and the stock market shut all week, and there will be a daily 60 euro limit on cash withdrawals from cash machines, which will reopen on Tuesday. Capital controls are likely to last for many months at least.”
-Greece imposes capital controls as crisis deepens
“Basically, a capital control is when the government tells you that you are no longer allowed to move your money around freely.
A government can use capital controls to order its banks to impose strict limits on daily withdrawals and overseas transfers of cash. It can also impose other measures such as limiting foreign exchange transactions.
In this case it would be to prevent euros flowing out of Greek banks – to overseas banks, into a different currency, or to be stashed under the mattress.”
-Greek debt crisis: What are capital controls?
“Until Saturday the last-ditch option to cover the IMF payment for Athens was to strike a deal on reforms and make available 1.8 billion euros worth of profits made by the European Central Bank on purchases of Greek bonds during the debt crisis.
But because Greece ended talks on a deal last night and called a referendum, the money cannot be disbursed and Greece is on course to default on Tuesday.”
-Factbox – Possible scenarios for Greece after a default
All Greek to you? Greece’s debt jargon explained