“Stopping the Bleeding”

Some countries have and are using capital controls during the global crisis for the more customary reason of stemming a financial or economic collapse. In these cases, the IMF has tolerated controls on capital outflows. This is notable insofar as the Fund and the neoclassical heart of the economics profession have long seen outflow controls as far worse than inflow controls.

Iceland’s policymakers put outflow controls in place to slow the implosion of the economy before signing an agreement with the IMF in October 2008. The agreement made a very strong case for the extension of these controls as means to restore stability and to protect the krona (IMF 2012a; Sigurgeirsdottir and Wade 2015). In public statements on the matter, the IMF’s staff repeatedly said that the country’s outflow controls were crucial to prevent a collapse of the currency, that they were temporary, and that it was a priority to end all restrictions as soon as possible. The IMF’s Mission Chief in the country commented that “capital controls as part of an overall strategy worked very, very well” (Forelle 2012), and the institution’s Deputy Managing Director stated that “unconventional measures (as in Iceland) must not be shied away from when needed” (IMF 2011a). The rating agency, Fitch, praised the country’s ‘unorthodox crisis policies’ when announcing that it had raised its credit rating to investment grade in February 2012 (Valdimarsson 2012). It should be said that neoliberals in the country did not share this enthusiasm for the unorthodox response or the IMF’s advice (Danielsson and Arnason 2011).[1]

The IMF’s characterization of and role in strengthening Iceland’s outflow controls marked a dramatic precedent and revealed a fundamental change in thinking about capital controls. The December 2008 agreement with Latvia allowed for the maintenance of pre-existing restrictions arising from a partial deposit freeze at the largest domestic bank (IMF 2009b). Soon thereafter, a Fund report acknowledged that Iceland, Indonesia, the Russian Federation, Argentina and Ukraine all put outflow controls in place to ‘stop the bleeding’ related to the crisis (IMF 2009a). The report neither offers details on the nature of these controls nor commentary on their ultimate efficacy, something that suggests that controls—even and most notably on outflows—are being destigmatized by the context in which they are being used, and by the Fund’s and, in the cases of Cyprus and Greece, the EU and the ECB’s measured reaction to them.[2] Indeed, a recent report by the IMF’s IEO (2015) takes note of the institution’s greater tolerance for outflow controls during the global financial crisis as exemplified by its support for outflow controls in Iceland, Cyprus, and Latvia.[3]

Cyprus was the first country in the Eurozone to implement capital controls during the global crisis. The IMF and the EU did not flinch when stringent outflow controls were implemented as the country’s economy imploded in March 2013. Cyprus’ capital controls evolved in the months that followed the March collapse and after it began to receive support in May 2013 under an IMF Extended Fund Facility. Capital controls began to be removed in March 2014, and the remaining controls were lifted in April 2015. Standard and Poors upgraded Cyprus’ sovereign debt rating in September 2015, and in doing so cited the removal of capital controls (Zikakou 2015). Greece became the second Eurozone country to implement capital controls. Stringent outflow controls were put in place at the end of June 2015 once Eurozone leaders announced that they would not extend Greece’s then current assistance package, and that the ECB would cap emergency liquidity assistance to the country’s banks.

  • [1] Temporary outflow controls have turned out to be rather long lived—indeed the central bank andthe Finance Ministry are planning to phase out the controls during 2016.
  • [2] See Chwieroth (2015) on the process of destigmatizing capital controls.
  • [3] The IEO (2015, p. 13) noted that staff did not approve of outflow and exchange controls in2008 in Ukraine (see also Saborowski et al. 2014).
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