What would happen if Greece imposed capital controls? Still no deal seen on the horizon...

The four-month negotiations between Greece and its creditors over the terms of the country’s bailout have not brought a deal, and the impasse is now hurting the country's banks. With savers emptying bank deposits at a record pace and lenders relying on more than 80 billion euros of Emergency Liquidity Assistance to survive, the European Central Bank’s aid becomes vital.

If the ECB’s Governing Council restricts ELA operations, Greece might have to impose capital controls - limiting the amount of money people can access from banks.

As negotiations drag on without an agreement between Greece and its lenders, speculation has grown that Greece will have to really impose capital controls. Joseph Lupton, senior global economist at JPMorgan, said that could buy more time.

"There are uncertainties here. How much of a liquidity shock is this going to represent? The other uncertainty is what (Prime Minister Alexis) Tsipras wants to do with the time that is created by capital controls. Tsipras wants to have Greece stay in the euro area, but the road they've gone down is pushing them toward an outcome where that is more unlikely."

Bloomberg has drawn a picture of what capital controls would look like in Greece.

How would capital controls work?

Based on Cyprus's experience, the definite answer is that they would hurt.

In Cyprus, ATM withdrawals were limited at 300 euros a person per day. A special committee was to approve transfers exceeding 5,000 euros. Firms had to present documents for each payment order, with approvals for over 200,000 euros determined by available liquidity. Parents couldn’t send children studying abroad more than 5,000 euros a quarter. Cypriots traveling abroad could carry no more than 1,000 euros with them. Termination of fixed-term deposits was prohibited, while payments with credit and debit cards were capped at 5,000 euros. Checks couldn’t be cashed.

Moreover, in Cyprus they were imposed during a long bank holiday, so there was an element of surprise for savers when banks reopened. However, during the holiday period, authorities got time to negotiate an accord with euro-area member states and the International Monetary Fund.

Are capital controls legal?

Rarely. The free movement of capital is one of the “four basic freedoms” of the European Union, however, restrictions are possible under “strict conditions on grounds of public policy or public security.”

The European Commission allowed Cyprus to do it, in the only instance on record, warning that there was significant risk “of complete destabilization of the financial system.”

How long can capital controls last?

There’s no exact limit. While they were supposed to be a temporary emergency measure, Cyprus kept control in place for two years. Over the two-year period, limits on transactions gradually eased before being lifted completely in April 2015. Experience from other countries, including Iceland, shows that once in place, they can only be lifted gradually, after a long period of time. This week Iceland’s authorities are expected to present a bill to lift capital controls implemented in 2008.

What could trigger capital controls?

As Bloomberg describes, much of the collateral that Greek banks have pledged against ELA is government-guaranteed bonds, and Greek sovereign notes, including treasury bills. A missed debt payment, or a breakdown in bailout talks, would probably lead euro-area central bank governors to conclude that these guarantees are no longer eligible for emergency cash, as the guarantor is bankrupt. The ECB could also impose a very high discount on the face value of Greek collateral, thus setting a hard cap on maximum potential ELA.

How would capital controls impact Greece?

They would buy time, however, at a very high price. If imposed, they may give Greece room to conclude a deal with creditors over a bank holiday. However, the limit on corporate transactions and deposit withdrawals would hurt retail sales, tourism, industry, imports and virtually every other sector of economic activity.

Other options for Greece?

Not likely. If the authorities let the ELA limit be emptied, there would be no money left in the Greek financial system after a few days, as savers would rush to withdraw as much cash as they can, while they still can. A complete exhaustion of ELA would push Greece out of the euro area, as no economy can function without liquidity.

Even if Athens plans to leave the currency bloc, capital controls would still make sense, as they would freeze time until it manages to print a new currency, or a currency equivalent.