Despite repeated assurances from the Greek government that it’s nearing a bailout deal, cash is running extremely low, and every day without one increases the chance that the government defaults on its debt repayments.
But what happens to ordinary Greeks in that situation?
Currently, the European Central Bank (ECB) has the Greek banking sector on life support in the form of Emergency Liquidity Assistance (ELA). That’s meant to be a short-term method to prevent a crisis of liquidity (as the name suggests).
It’s not a long-term prop for the system, and the ECB may not continue providing the funds if the country becomes even more obviously insolvent.
Gilles Moec from Bank of America explained this in a recent note:
By controlling Greek banks’ access to liquidity via ELA, the ECB is in a crucial position. Were the central bank to “turn the tap off”, then mechanically the Greek banking sector would go bust, since resident credit institutions could no longer deal with the deposit outflows.
So a default could easily mean capital controls, with a lockdown not unlike the one brought in by Cyprus in 2013. Initially at least, some banks were only able to distribute €100 (£72, $US112) per day from a bank account. Anyone trying to leave the country with more than €10,000 (£7,188, $US11,153) could have it seized, and companies looking to buy and sell large amounts abroad were subject to checks.
According to the Guardian, Greek institutions are concerned about extreme social unrest. Some officials are worried that if Greece tried to bring in the sort of bank deposit tax that happened in Cyprus, there would be open violence:
“People are taking more or less everything they have got out of their accounts for fear that the government will be dipping into them next,” said an official talking on condition of anonymity at the Bank of Greece…
“We would see the revolt that this crisis has not yet produced. There would be blood in the streets. The Greeks are not like the Cypriots,” added the Bank of Greece official.
Cyprus’ bank deposit tax was brought in parallel to an international bailout, hitting any holdings worth more than €100,000 (£71,840, $US111,480) with a 10% levy — one might seem appealing to the Greek government once investors were no longer able to pile out. Euromoney has also previously suggested that fear of such a tax has been driving big withdrawals.
According to Gabriel Sterne at Oxford Economics, it would bring in a “further deep recession” — Greece’s economy is already in a pretty dire position, but the inability to get money in and out of banks would be a massive headache for businesses and investors.
Berenberg’s analysts go further: “Even if the financial system is managed as well as possible under the circumstances, we expect the cash drought and capital controls to set off a sharp recession in Greece. GDP may decline by another 5-10%.” For context, 10% is equal to the sort of slump Greece recorded at the very worst points of the euro crisis. Unemployment would rise from its already eye-watering levels, and such an event would leave the country’s economy about two thirds of the size it was before the financial crisis.
There would be other strange events in the lives of ordinary Greeks. For example, IOUs might begin to surface in place of currency. The government can’t pay its creditors in a parallel currency, but it could pay pensioners, contractors and public servants. The cash alternative would hold value in the same way that any other modern money holds value — because it’s backed by the government.
Although in this case, while euros are backed by a European institution (the ECB), the IOUs would be backed by the Greek government alone, and would likely be worth very little outside of the country. Here’s how Capital Economics think that would play out:
Shopkeepers (and other economic agents) would find themselves obliged to accept these IOUs as payment (whether or not they were declared as legal tender). But they would not be obliged to accept them on equal terms with euros proper, and they surely would not want to. A dual pricing system would develop; a good (or service) would cost 100 euros but, say, 110 IOUs.
Of course, anyone being paid in IOUs would then demand a pay rise. A parallel market would likely open up too, with holders of the IOUs bidding for euros.
You can imagine what that would do for the public’s faith in the new monetary scheme.
It’s easy to see how hard it would be for Greece to get back into the eurozone properly after this (without controls) — but a Grexit scenario would likely mean even more social unrest, spiking inflation and financial outflows. The halfway house of a frozen banking system and a strange shadow currency might actually be the best option in that case.
In this scenario almost everything depends on how the ECB behaves. If it’s willing to turn a blind eye to a technical default and keep holding the banking system up, thing could keep going as they are — but if it isn’t, Greece’s situation could get much worse, and quickly.