More details out this week from failed Greece debt talks have thrust the talk of "capital controls" back into the global financial conversation.
Earlier reports out of Germany hinted at the possibility that Athens would be required to impose capital controls if no cash-for-reform deal was reached by the weekend, though Greece officials denied that was the case.
But just what are capital controls?
Technically, a capital control is a roadblock put in place by a government to restrict the flow of money out of or into its country. They can be directed at individuals, industries, companies, banks, and other governments and effect currencies, equities and debt.
Emerging markets are where capital controls are most often put in place as a developing economy does not usually have enough currency, gold or other capital needed during a crisis. Though Greece may not necessarily be a developing economy, it meets the standard for lacking capital as the country struggles to devise a way to pay the 1.5 billion euros it owes the IMF by June 30. And that's just the first payment among many.
Why impose capital controls?
Capital controls are enacted when an outside force causes a government and/or central bank to lose control of its currency. That's not the only reason however. Some are the longstanding policy of a country looking to restrict foreign influence.
The crucial feature of any paper currency is that it remains a "store of value." When volatility threatens that value, capital controls may be needed.
What are the most common kinds of capital controls?
- Restricting individuals from converting the local currency.
- Restricting individuals from buying foreign securities such as equities and bonds.
- Limiting withdrawals from banks.
- Taxes on transactions with foreign companies.
For Greece, the above would help prevent bank runs and keep precious needed funds within its banking system. For creditors, it could serve as an incentive for a country to agree to a deal sooner, as controls can often make it harder for companies to do business. But creditors often lack the leverage to impose the controls; the Greek government would have to pass controls themselves.
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Capital controls have successfully brought about solutions in the past.
After World War II, rules were put in place for a free-flowing global economy. However, many countries were not ready for this because their economies were too small and industries too underdeveloped. Capital controls were common as a way to ensure if tough times came to a country, individuals and companies couldn't flee the local economy, thus reducing the value of that currency to zero and grinding economic growth to a halt.
Reckless lending by banks in Cyprus pushed the country into a credit crisis. In 2013, the government of Cyprus put in capital controls, including limiting the amount of physical cash that could be transferred out of the country or taken with an individual traveling to another country. Earlier this year, Cyprus lifted many of those controls.
—Reuters and CNBC's Zack Guzman contributed to this report.