Will Greece be able to stop capital controls? Here are its options

After voting against accepting proposals put forward by creditors in Sunday's referendum, Greeks are now facing capital controls – ATM withdrawals are limited to €60 (£43) a day.

 

Meanwhile, suppliers are demanding businesses pay cash up front, making normal commerce impossible.

 

Soon, the country could completely run out of cash altogether – analysts predict this could happen in a matter of days unless a deal is agreed upon fast. 

 

So, what are the possibilities for Greece and how could it emerge from the current freeze? 

For the Greek banking system to be unfrozen and day-to-day transactions to resume, the European Central Bank must resume its emergency liquidity assistance (ELA) for Greek banks – continuing to cap it at €89bn amounts to liquidity suffocation. 

 

The Bank of Greece (BoG) said on Sunday evening that it will make a formal request to the ECB for fresh support, and the ECB is reviewing the situation. However, it is likely it won;t turn the tap on again unless it feels confident Greek banks are solvent and it is not pouring taxpayer money away. 

 

What the ECB does next rests heavily on the outcome of the next round of Eurozone talks. 

Some have mooted the idea of issuing IOUs – notes stating that their owner is owed money from the government.- to pay wages, pensions and settle outstanding accounts.

 

They would be accepted by governmental agencies as legal tender until a permanent deal is reached with Europe or a new currency is printed.

 

California provides an example of how this method can be effective – when it faced a cash crunch because of its inability to pass a balanced budget, it had to issue IOUs to public workers temporarily until the issue was resolved.

 

Before resigning, Greek finance minister Yanis Varoufakis told The Telegraph that "if necessary we will issue parallel liquidity and California-style IOU's, in an electronic form. We should have done it a week ago".

Neither Greece nor its creditors want the country to leave the euro – this could create massive unemployment and, probably, a recession. A more likely outcome, at least temporarily, will be that a second currency is launched alongside the euro.

 

The Greek government could create a Local Currency (LC) which is backed by the euro and use this to pay 50 per cent of its expenditures.

 

It would take time for Greeks to adjust to the new currency, and it would certainly be worth considerably less than the eruo. Further down the line, however, it would help Greece regain control of its monetary policy.

The much-feared Greek exit from the euro will turn into reality if the Greek government fails to reach some form of agreement with creditors, whether temporary or permanent. 

 

So far, the ECB has aligned itself more with those on the other side of the negotiating table, and the bank has told Greeks the ELA programme must not threaten monetary policy, suggesting that the credit lifelines to the Greek banks could be cut off.

 

An important determining date will be 20 July – this is when Greece must pay €3.5bn on a bond held by the ECB. If it doesn't meet this payment, the ECB could withdraw all its emergency credit, collapsing Greece’s banking system.

 

Analysts believe that could be the trigger for a Grexit unless nothing else is agreed upon in the meantime. 

 

If this happens and Greece leaves the euro, it will have to start printing its own currency immediately.