People wait in line to withdraw €60 from an ATM in Athens after Greece closed its banks on June 29, 2015. Greece closed its banks and imposed capital controls on Sunday to monitor the growing strains on its crippled financial system, bringing the prospect of being forced out of the euro into plain sight.Milos Bicanski/Getty Images
Desperate times call for desperate measures.
The implementation of capital controls in Greece is the latest in a series of such moves by countries in financial turmoil. Cyprus, on the brink of bankruptcy two years ago, slapped restrictions on how much money could leave the island.
For Greece, capital controls have an air of inevitability about them given the European Central Bank's decision to freeze the amount of emergency loans to the Greek banks.
But they also help feed the uncertainty and fear over the broader ripple effect of the crisis in Greece on European and global markets. European stocks plunged in Monday trading on anticipation of a Greek default and exit from the euro zone.
The harsh reality of capital controls could be a deciding factor July 5 in swinging voters to a Yes in favour of the latest bailout measures offered by creditors to Greece.
The critical difference between Cyprus and Greece is that Cyprus had a less confrontational government and a population more favourable to austerity measures and structural reforms, said Gabriel Sterne, head of global macro research at Oxford Economics.
"Even if there is a referendum in favour of implementing [economic reform in Greece], you will still need a government to implement a plan to get rid of capital controls," he said.
"It took two years for them to come off in Cyprus. There is no way it will be that quick in the case of Greece. It will be far longer."
The longer capital controls remain in place, essentially stemming the free flow of capital into and out of Greece, the greater the likelihood of its exit from the euro zone, Mr. Sterne said.
"Once you are in capital controls, you probably have a 70 per cent chance of exit."
If the vote on Sunday is No, the result will likely be interpreted as a vote for an exit from the euro zone, Pavilion Global Markets' head of global strategy and markets Pierre Lapointe said in a research note Monday.
But if it is Yes, the proposal from creditors on which the Greeks are voting will no longer be on the table as it expires Tuesday, Mr. Lapointe points out.
"In such a scenario, we would expect that: 1) capital controls would remain in place for some time; 2) the Greek economy would struggle as exports would contract due to the lack of financing; and 3) the ECB would step in to limit the contagion to other Eurozone peripheral countries."
"The country is in a deep coma," Ipek Ozkardeskaya, market analyst with London Capital Group, said in a research note Monday.
"The ship has finally sailed. The Grexit is not a tail risk any more and the market is aggressively pricing in the Greek default and a dangerously forthcoming exit from the euro zone."
"The referendum that is due to take place in Greece at the weekend will be the sink or swim moment; either the Greek people fall in line with austerity or jump and go it alone," David Madden, market analyst with IG, said.
"Athens has been racking up a tab at the last-chance saloon for several years, and now it's time to settle up."
Bertrand Marotte