by Hans-Werner Sinn
February 16, 2015
Another crisis, another insidious bout of capital flight. In Greece today, as in Cyprus three years ago, depositors are withdrawing bundles of euro notes to be spirited out of the country. Most of all, investors are rushing to make electronic transfers to banks elsewhere in the eurozone. In December 2014 alone, €7.6bn were sent abroad, equivalent to about 4 per cent of Greece’s economic output.
In 2012, Cyprus was in a similar bind. Wealthy Cypriots (and foreigners who had deposits there) tried to whisk their funds to safer places, draining liquidity from the island’s banks and threatening them with insolvency.
The Cypriot central bank kept the system afloat by lending out €11bn of newly created money under a protocol known as Emergency Liquidity Assistance. These funds were in effect borrowed from other eurozone central banks, which put euros into the new accounts outside Cyprus that were being set up by fleeing investors.
Without that support, Cypriot banks would have gone under, and depositors could have withdrawn no more cash. As it was, capital flight — financed by other eurozone central banks — continued until spring 2013, when the abuse of the eurozone’s emergency protocols grew too large to ignore and the European Central Bank pulled the plug. Cyprus then had no choice but to impose capital controls; without the ECB’s generosity, it would have done so much earlier. By the time Laiki Bank was pushed into insolvency, it had received €9.5bn in ELA credits.