Yikes, we didn't think there were any journalists left with a common sense understanding of history! But alas, she's not American...
Worried savers have been pulling their cash out of Greek banks at a rate of up to €1bn a day, and fears are growing that a bank-run could ensue if the radical Left Syriza party wins this weekend’s elections.
If Greece does exit the euro, a new drachma currency will have to be formed by the new government Photo: Getty Images
Capital controls such as limiting bank withdrawals if Greece were to leave the
euro have already been discussed and the vote could determine Greece’s fate.
Q What happens when countries use capital controls?
A Take Argentina in 2001. Although the country was not part of a
monetary union like Greece, its fixed exchange rate meant an Argentine peso
was worth one US dollar. Its borrowing costs shot up, while the exchange
rate meant exports became uncompetitive.
Fears that capital controls might have to be imposed became self-fulfilling
and a bank run ensued when the IMF hinted the country could be required to
impose restrictions to prevent such an occurrence.
In December 2001, the government limited bank withdrawals to 250 pesos a week,
in a move known as el corralito, or little fence. Domingo Cavallo, the
minister who introduced the restrictions, told The Sunday Telegraph that
with hindsight, he would have called a bank holiday instead.
“If there is no accepted solution, then just imposing cash withdrawal
restrictions will not solve any problems,” he said.
Q Who loses out when bank runs lead to currency break-ups?
A In a word: savers. When Argentina liberalised the exchange rate, depositors saw the value of their savings drop by 75pc within 6 months.
Q Are there any winners?
A Usually debtors. Large companies which had sent dollars abroad before the corralito were able to repay their debts at a fraction of the cost.
Q In Europe are capital controls even legal?
A It depends. Europe’s internal market rules prohibit restrictions on the movement of capital unless there is an issue of public security.
Others have a firmer view. “It’s very simple – if Greece imposes capital controls it leaves the euro,” says Paul Donovan, managing director of global economics at UBS. “Capital controls would mean that a euro is worth more in one part of the monetary union than it is in another.”
Q So, do capital controls always lead to break-ups?
A No, but it’s one of the first steps. One of the fastest break-ups was Czechoslovakia in 1993.
The two countries planned to use the same currency for a minimum of six month, but this only served to hasten the flow of money from the Slovak side of the border. The capital flight became so extreme that they had to seal the border and hasten the currency separation.
“We learned that postponing solving the problem is most dangerous,” a spokesman for Vaclav Klaus, the Czech prime minister, said at the time.
Hmm. Sound familiar? Source TelegraphUK
Q Who loses out when bank runs lead to currency break-ups?
A In a word: savers. When Argentina liberalised the exchange rate, depositors saw the value of their savings drop by 75pc within 6 months.
Q Are there any winners?
A Usually debtors. Large companies which had sent dollars abroad before the corralito were able to repay their debts at a fraction of the cost.
Q In Europe are capital controls even legal?
A It depends. Europe’s internal market rules prohibit restrictions on the movement of capital unless there is an issue of public security.
Others have a firmer view. “It’s very simple – if Greece imposes capital controls it leaves the euro,” says Paul Donovan, managing director of global economics at UBS. “Capital controls would mean that a euro is worth more in one part of the monetary union than it is in another.”
Q So, do capital controls always lead to break-ups?
A No, but it’s one of the first steps. One of the fastest break-ups was Czechoslovakia in 1993.
The two countries planned to use the same currency for a minimum of six month, but this only served to hasten the flow of money from the Slovak side of the border. The capital flight became so extreme that they had to seal the border and hasten the currency separation.
“We learned that postponing solving the problem is most dangerous,” a spokesman for Vaclav Klaus, the Czech prime minister, said at the time.
Hmm. Sound familiar? Source TelegraphUK
