Sir, Ferdinando Giugliano writes: “Greek authorities have imposed sweeping capital controls to prevent a collapse of the banking system that threatens to push Athens out of the Eurozone. But with economic activity grinding to a near halt and the country’s banks still bleeding deposits, the price of these extraordinary measures is becoming apparent… The downturn is bound to curtail tax revenues, worsening the Greek government’s dire finances”, “Capital controls squeeze a suffocating economy” July 3.
That, though entirely correct, does not tell the whole story. It was when regulators introduced credit-risk-weighted capital requirements for banks, which distorted the allocation of credit to the real economy, that an inconspicuous and dangerous form of capital controls was introduced. And since the lowest risk-weights were assigned to sovereigns (governments), the greatest beneficiaries of such controls were statist ideologues and government bureaucrats, which was a very inconspicuous form of clientelism too.
For instance, although admittedly it must be hard to believe, between June 2004 and October 2009, European banks were allowed to leverage their capital 62.5 times to 1 when lending to the Greek government. And of course that caused the banks to lend too much to a government that found it too hard to say no to credit.
But now many governments, like Greece, need to build up their tax-base, something that requires allowing ordinary SMEs and entrepreneurs to have fair access to bank credit. And this has created a conflict for those statist ideologues and government bureaucrats who feel they still have room to benefit from these regulatory advantages. How are they supposed to recommend their less lucky-colleagues to give up, what they had all considered to be entitlements gained for their class written in stone?