The leak about capital controls in Greece is a sure sign the ECB is falling apart

from Business Insider A report in a German newspaper on Thursday that the European Central Bank (ECB) discussed capital controls for Greece, which was subsequently denied by the ECB, highlights deep tensions within the institution. Capital controls basically mean extremely tight restrictions on investments and deposits in banks. When Cyprus brought in capital controls in 2013, ordinary people couldn’t withdraw more than €300 from banks each day, and businesses couldn’t send more than €5,000 abroad without proof that it was for international trade. These rifts at the ECB threaten to make the problem for Greek banks all the more severe. The thing that sets the ECB apart from other central banks is that it has to set policy for 19 countries, which means it has to cater to different governments that often have divergent needs and interests. Internal politics within the organisation are magnified because so many countries are involved. Thursday’s leak regarding capital controls provides a good example of the inside squabbles. The German newspaper Faz, in which the leak was reported, is usually a reliable proxy for the mood at the Bundesbank, the German central bank. While the source of the leak has not been confirmed, if it did come from the Bundesbank, it could reveal some worrying fractures within the ECB’s Governing Council. These may be as wide as the political divide between Europe’s largest economy and the new Syriza-led government in Greece. To start, the somewhat under-reported headline of the article is “Central bankers lose faith in Greece.” The central claim of the piece is that numerous people in the ECB now believe that Grexit — Greece’s exit from the euro — is now the most likely outcome of the current standoff. The alleged discussion of currency controls is therefore framed in light of that. Greek banks ECB Faz reports that Greek savers have withdrawn €20 billion from their accounts since December, as uncertainty surrounding a new bailout deal for Greece has made people nervous about the stability of the banking system. The outflows have forced the ECB to increase the limit it imposes (at its discretion) on emergency funding for the banks twice, to €65 billion from €60 billion on February 12 and again to €68 billion on Wednesday. Even the suggestion that Greek depositors could find that limits may suddenly be imposed on how much they can withdraw from their accounts risks increasing the pace of these deposit outflows. The ECB’s swift denial of the discussions should also be seen as an effort to downplay that threat — but the damage, as they say, may already have been done. It all comes down to who will be left with the bill if Greece and its eurozone partners fail to reach a mutually acceptable compromise. Continue Reading>>>

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