A year on, capital controls still biting

Tuesday marks a year since Greece held its referendum on whether to accept bailout terms from its creditors. Twelve months on, it is difficult to assess what kind of impact those crazy, passionate and traumatic days last July had on Greeks.

For instance, have we since grown wiser, aware of the limited options the country has as long as its economy is a wheezing wreck, reliant on respiratory assistance from creditors? It is tough to say. It certainly seems that one of the benefits of last summer’s dramatics has been the dispelling of some illusions about what Greece can achieve in terms of bargaining with the institutions or striking out on its own. Even Prime Minister Alexis Tsipras famously admitted recently that his government had been under “false impressions” last year.

The problem is that there is no real way of measuring this apparent adjustment. It is not something that has been addressed in opinion polls and anecdotal evidence is not enough to go on.

In contrast, we can measure more precisely the impact that last summer’s escapade had on the country’s economy. While the anniversary of the referendum may grab attention internationally (referendums are quite the topic at the moment), it is mostly within Greece that people have also noted it is one year since banks closed (for three weeks) and capital controls were introduced as the European Central Bank shut off liquidity to Greek lenders and fears of a devastating bank run mounted after Tsipras announced his decision to call the plebiscite.

During the year since capital controls were introduced, as the Hellenic Confederation of Commerce and Entrepreneurship (ESEE) highlighted, imports dropped by 11.7 percent, consumption fell by 4.3 percent and 3,000 fewer business were created.

It does not make for happy reading and highlights the self-inflicted damage that was done to Greek businesses as a result of the government allowing the situation to reach a point where the banking system was shut down to a large extent.

However, another story is hiding behind these disappointing figures and, in an odd way, it is encouraging. It is a story of survival in the most testing of conditions, which has gradually become a theme for the Greek economy over recent years.

For instance, while there was a decline in the number of new businesses dipping their toes into the unwelcoming waters of the Greek marketplace, 12,486 companies still decided to give it a go over the last 12 months, according to ESEE. In many ways it is remarkable, that anyone should want to test their entrepreneurial skills or risk their capital in such a forbidding environment.

Also, though there has been a decline in private consumption, it too has weathered the storm much better than expected. In fact, it rose by 0.3 percent of gross domestic product in 2015 before contracting by 0.4 percent quarter on quarter in Q1 of this year.

It should also be noted that overall the economy performed much better last year than had been expected when banks rolled down their shutters. The imposition of capital controls led to most experts predicting a significant drop in output. For instance, the third bailout agreement signed in August 2015, some two months after the restrictions were put in place, forecasted a 2.3 percent contraction for the year. Instead, the economy shrank by 0.2 percent of GDP.

It is by no means a cause for celebration but perhaps provides some hope that if the economy can defy the odds in such emphatic manner, perhaps a recovery could also come quickly if stability is restored.

The truth, though, is that many more factors are needed to fuel a recovery than to withstand a collapse. For instance, last year’s milder-than-expected recession is largely attributed to the fact that household consumption did not dissolve in the way that many expected. To a great extent this had to do with Greeks using the cash they had withdrawn from their bank accounts, the so-called mattress money (more than 40 billion euros were withdrawn between December 2014 and last summer), to buy electrical goods, cars and other items they thought would be out of reach if the country left the euro or their deposits suffered a haircut.

There is no such single factor that can work the magic to instigate a return to growth. It appears that we are in for a long, hard slog. Everyone expects it to get a little worse before it gets better. The European Commission sees a contraction of 0.3 percent of GDP this year, while the International Monetary Fund expects the recession to reach 0.6 percent.

The Greek business world will be well aware that there are no quick fixes out there. In one respect the end of this incredible period, which was marked by the start of capital controls, will only come when the restrictions on cash withdrawals and the movement of money are lifted. It is only then that Greek firms will be able to feel that the necessary confidence in the country and the local economy has returned.

In Cyprus it took two years for capital controls to be removed. Opinion is divided on when Greece will be in a similar position but it is unlikely be any time very soon. In the meantime, Greek businesses will have to soldier on, hoping that their astonishing powers of endurance do not desert them.