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How Two Years of Capital Controls Hurt Greek Trade

It was June 27, 2015 when the finance minister at the time, Yanis Varoufakis, and the Greek government decided to impose capital controls in the midst of negotiations with creditors over the country’s bailout.
Two years ago on this date, Greek citizens found out that they can only withdraw up to 60 euros per day, no matter what their needs were. Small business owners operating with cash found themselves in a bind — even more so, small and medium trade businesses making transactions with international suppliers. Many small and medium businesses closed, unable to cope. The uncertainty made international suppliers demand pre-payment of goods before they were shipped out to Greece, tying the hands of enterprises based on imports.
At the time, the Greek government tried to pin the imposition of capital controls on creditors. Varoufakis, however, stated that only the State and the country’s central bank can make that decision. The ambivalence regarding who was responsible for the controls continued until, two years later, it became the norm in crisis-stricken Greece.
Yet, the upside of the imposition of capital limitations is that Greeks increased the use of debit and credit cards for payments, thus curbing tax evasion to a certain degree.
The Hellenic Confederation of Commerce and Entrepreneurship (ESEE) created a report for the completion of two years of capital control enforcement in the Greek economy, assessing the impact of the measure in entrepreneurship and the market.
It lists eight parameters that have played an important role in the development of capital limitations so far and has directly influenced the way of operating and the design of thousands of businesses.
1. Liquidity
The restrictions imposed by the introduction of capital controls, both in terms of daily cash withdrawals from ATMs and international transactions, have relaxed. The necessary approval by the competent Committee (Banking Committee for Transaction Approval) for companies importing goods, raw materials, machinery etc proved to be time-consuming and condemning for many of them.
At the same time, and with the ultimate goal of ensuring the operation of their business, a number of businesses have been forced to take measures such as delaying payments to suppliers and their staff (payroll) or even freezing the production process of their units due to lack of raw materials. The imposition of restrictions on capital movements has caused major complications in the market because of the swelling bureaucratic procedures involved in paying suppliers abroad.
An important finding that has been particularly noticeable over the course of months is that capital limitations proved to be particularly damaging to small and medium-sized businesses. This is because the companies in question do not have the necessary liquidity, nor do they have large storage facilities, which is why they are forced to make more frequent imports of smaller quantities of goods, sometimes even at higher prices.
At the same time, improper processing of imports often affects export companies as many of them import raw materials from abroad that are necessary for the production of their products. Thus, the problem is extended to exports, further burdening the country’s already high trade deficit.
Due to the increased risk, the prepayment of merchandise, even at the order stage, is now a common practice, while businesses in order to cope with the cost increase caused by the prepayment of the goods are forced to increase the volume of orders to reduce the cost of frequent small orders. At the same time there are delays in transactions, causing not only financial damage but also a “loss of reputation” for the business.
2. Deposits – ELA
The large outflow of deposits from the domestic banking system, some 42 billion euros between November 2014 and June 2015, has made the enforcement of capital restrictions a necessary evil for the survival of banks. Today, with deposits from the private sector (businesses – households) amounting to 119 billion euros, conditions have been largely normalized.
Another parameter to illustrate the marginal situation in which banks were driven to was the extraordinary liquidity of 89 billion euros that they had drawn from the Emergency Liquidity Facility (ELA) in July 2015. The overall dependence of the domestic banking system on ELA dropped from 65.1 billion euros in 2016 to 40.7 billion euros in May 2017.
3. Turnover Index & Volume Index in Retail Trade
The twelve-month comparison of July-June 2015 / July 2015-June 2016 (twelve-month averages), a period during which the impact of capital controls has become more tangible, shows a drop in the LLC in Retail Trade by 4.9%, while the Volume Index dropped to 3.3%. The observed improvement in the last nine months (July 2016-March 2017: latest data available) confirms the view that during the first 12 months of the imposition of capital controls and the intensity of the negative impact on the turnover of enterprises reached its peak.
4. Progress of Turnover Indicators in Wholesale and Automotive Trade before and during capital controls
The analysis of the figures shows the opposite trend recorded by the turnover of the wholesale trade, relative to that of the car trade. In the wholesale trade, capital restrictions left their indelible mark until the end of the previous year, with the result that the improved turnover of the industry, and therefore the liquidity of the companies, was not realized until the end of the first quarter of 2017.
On the other hand, with the exception of the first quarter of capital controls, the turnover was at a lower level, the sale of Cars exceeded the pre-capital limits (Q2 2015) as early as the last quarter of 2015 by 8.3%. Indeed, the resulting stabilization of the index over the last three quarters of 2016 is interrupted by its unexpectedly marked rise in the first quarter of 2017.
Despite the prevailing market uncertainty over that period, the flow of liquidity into the real economy was directed towards car sales, while investment in durable goods seemed to be a sufficient incentive for the consumer.
5. Trade balance of goods before and after capital controls
The decline in the trade deficit of goods by 4.97 billion euros during the first year of capital controls enforcement (July 2014 – June 2015 / July 2015 – June 2016) is based solely on the dramatic decline in imports (-7.41 billion euros), as export activity declined by 2.44 billion euros. Over the last ten months (July 2016 – April 2017), there was an improvement over the corresponding ten-month period July 2015 – April 2016, in terms of exports by 2.12 billion euros. Of course, there is a simultaneous rise in imports by 3.51 billion euros, but this development is attributed to the great restoration of the operating and liquidity conditions of the market.
6. Red Loans
The launch of non performing exposures (NPE) at around 105 billion euros came largely from the bank holiday in July 2015 and the resulting turmoil caused by the imposition of capital restrictions. The uncertainty that prevailed over the period in question contributed to the attitude of borrowers, who stopped making payments.
7. Checks
The use of checks, a common form of payment for goods and services, has been hit hard by the imposition of capital controls. This development in essence “froze” the real economy, as it once constituted a parallel credit system through which approximately 150 billion euros are used for payment every year.
8. Incentive for making electronic transactions during capital controls
The imposition of capital limitations gave citizens the incentive to use electronic forms of payment for their transactions, with a significant increase in POS machines (100,930 or 79% increase), an increase in debit and credit card transactions by 84% and transfers (+ 24%), an increase in the value of direct debits for fixed payments of 3.2 billion euros (+ 47%), an increase in the value of internet and mobile banking transactions by 29% (+11.2 billion euros) and (+359 million euros respectively. In addition, extremely low levels of fraud have been recorded, both in terms of transactions and in terms of value.

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