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June 29, 2015

Greek Crisis: What's Next After Capital Controls?

Greece Imposed Emergency Capital Control

Greece is still staring down the barrel of a $1.8-billion loan payment to the IMF (supposedly due on Tuesday). The latest development is that Greece imposed emergency capital controls and closed banks starting Monday June 29 until after a July 5 referendum on a deal with European creditors. The real cash has already fled as people have moved most capital (that could be moved) out of Greece, which could be partly why things in Greece have so far remained in an orderly fashion.

Global Investors Run for Safety

Media reported long lines at ATMs (ATM withdrawals have been limited to 60 euros per card), while global markets shuddered on Monday under the fear of a contagion effect from a Greek default. On top of the Greek Drama, investors are also troubled by the bubble trouble in the Chinese market as PBOC took actions over the weekend to avert a risk of market collapse.

Related - Chinese Stocks: "How to Think Like a Billionaire Investor" 

Euro, the EU bloc currency, reacted badly to the Greek Drama (see chart below).  Greek two-year bond prices yields jumped to ~ 34%, while investors run to safety as prices of 'safe haven bonds' from Britain, Germany and the United States all rose.

Chart Source: The New York Times, June 29, 2015

 Global Implication    
  
NYT quoted Rajiv Biswas, chief economist for Asia at IHS Global Insight, saying that if Greece defaulted and left the eurozone, the effects on Europe’s economy and on exporters in Asia would depend on whether European leaders could prevent financial troubles from spreading to Portugal, Spain and possibly Italy. However, the damage would not be as bad as people seem to be preparing, as Biswas estimated in the case of a contagion, economic output in Asia could drop 0.3% next year on lower exports to Europe.


Referendum Is A CYA by Tsipras & Syriza

I believe Greek people (including PM Tsipras and the Syriza Party) want to take the deal to stay in EU and the Eurozone (who wouldn't with so many perks associated with being a member of the bloc). However, since Alexis Tsipras the leftist Syriza party won the election by making promises to voters that they could go back to the way it was, and the EU would fold.  Well, EU and Merkel not only did not fold but also got totally fed up.

Basically, this is as good as it gets for Greece, and everybody knows it.  But Tsipras and Syriza party have to put it to a vote so they may spin it as a 'voter decision' to save face with their constituents.

Debt Problem Years to Come

For now, the situation in Greece could get much worse if voters refuse to accept creditor-imposed reforms in the Sunday referendum.  CNBC reported that billionaire Willbur Ross expressed concern of a possible social unrest in Greece.  Since Wilbur Ross has a large interest in Greece, I think he may have a biased view.  I believe the most likely outcome is that the referendum would pass on Sunday, and Greece would stay within EU and the Eurozone.  

However, a deal is by no means the end of anything.  This Greek Debt Drama may be in production for years to come where Greece would be stuck digging itself out of the hole it has created through years of deficit spending and free borrowing.


Graphic Source: WSJ.com (updated June 29, 2015)

Graphic Source: BBC
Greek Capital Controls  
    
The following is a translation of a document provided by the Greek government via Bloomberg, giving details on the capital controls, if readers would like to catch a glimpse:
  • From Monday, June 29, 2015, banks will remain closed up to and including Monday, July 6 
  • Deposits are fully safeguarded  
  • The payment of pensions is exempted from the restrictions on banking transactions. Management of credit institutions will announce how these will be paid  
  • Electronic transactions within the country won’t be affected. All transactions with credit or debit cards and other electronic forms (web banking, phone banking) can be conducted as normal  
  • Prepaid cards may be used to the limit existing before the beginning of the bank holiday  
  • From midday June 29, ATMs will operate with a daily cash withdrawal limit of 60 euros per card, which is equivalent to 1,800 euros a month  
  • Foreign tourists can make cash withdrawals from ATMs with their cards without restrictions provided these have been issued abroad  
  • A special Committee to Approve Bank Transactions has been established at the State General Accounting Office in cooperation with the Finance Ministry, the Bank of Greece, the Union of Greek Banks and the Capital Markets Commission. This committee will deal with applications for urgent and imperative payments that can’t be satisfied through the cash withdrawal limits or by electronic transactions (e.g. payments abroad for health reasons). Wages paid electronically to bank accounts aren’t affected

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