Foreign exchange controls

Foreign exchange restrictions are all interventionist measures of a government to regulate the payment transactions with foreign countries with the aim of stabilizing the exchange rate, and of providing a balance of payments balance or preventing currency speculation in the foreign exchange control.

Foreign exchange restrictions require centralized state control and supervision of the entire foreign trade. While the foreign exchange control aims at full steering on foreign trade, individual measures are referred to as partial exchange control or currency restriction.

Term scope

Exchange control in the strict sense is when resident individual (ie domestic enterprises and households ), although immediately may enter into foreign trade transactions with non-residents, but are subject to foreign acquisition, acquisition or use of state verification. With foreign exchange restrictions a government limits the amounts of money to domestic and / or foreign currencies that may flow reversed in the country or from abroad and connects Violations often with criminal consequences. These restrictions ranging in scope from complete prohibition of the money and capital movements on the authorization of individual facts to exchange (partial restrictions). This includes restricting the import or export of capital or the opportunity to give residents greater freedoms payment as foreigners ( Inländerkonvertibilität ) or vice versa. Such restrictions are statist intervention in the free market economy and adapted to limit or abolish the free convertibility of a currency. Reasons are of a general shortage of foreign exchange and / or attempting to seek or maintain a non-market exchange rate. Low trade elasticities are the consequence rather than the cause of foreign exchange restrictions.

Fixed exchange rates

In an exchange-rate system with parties exchange rates basically there is the need to defend the fixed exchange rates against market fluctuations. To this end, the central banks accept foreign exchange intervention on reaching the upper or lower intervention rates before and to sell / buy the currencies concerned to establish the fixed exchange rates again with the help of these interventions. If the market prices deviate from the established exchange rates too wide or permanently or not enough foreign exchange reserves of the trading banks, foreign exchange controls are the only way to maintain the fixed exchange rates.

The importation of foreign varieties and export its own varieties and precious metals - especially platinum, gold and silver - is limited in this case and followed the violation of this restriction as currency offenses under criminal law. For this reason, existed at the time of the gold standard in all countries, legal restrictions of foreign trade in gold. These legal restrictions on trade in gold had the purpose, set gold price of U.S. $ 35 per troy ounce - also a fixed exchange rate - to stabilize; these trade restrictions, gold was already an early form of the foreign exchange constraint.

History

Are typical foreign exchange restrictions for weak currency countries, because these see an appropriate tool to back up their currency in restrictions on foreign exchange transactions.

Foreign exchange restrictions since the global economic crisis

Many states, including Britain, France and the German Empire led since the global economic crisis, a comprehensive foreign exchange restrictions. The German Empire began in 1932 under the government of Brüning 's emergency decrees by the free movement of foreign exchange, precious metals and varieties limit. Influential was especially the emergency decree of August 1, 1932 RGBl. 421 With the implementation of the Regulation, the Reichsbank and certain of its foreign currency investigation offices was entrusted. From 1938 Devisenschutzkommando commands were used.

Currency restrictions in the Eastern Bloc

All members of the Council for Mutual Economic Assistance ( " Eastern Bloc countries " ) had from 1949 very extensive restrictions on the money and capital introduced in order to restrict the free exchange of their currencies and beyond even the movement of goods and capital. The socialist countries of Eastern Europe reported until 1989 to a chronic shortage of foreign exchange, as their products in the West were largely unsellable and at the same time the importation of Western goods was necessary. Since the exchange rates for ideological reasons, have not been altered, were strong foreign exchange restrictions to prevent the outflow of foreign exchange result. In all socialist countries the free exchange of the respective currencies was prohibited. In the case of the GDR, the official exchange rate between DM and Ostmark was 1:1. The result was the emergence of a black market, on which the Ostmark was traded at a ratio of 5:1 to DM. The law regulating the domestic payment transactions of the GDR regulated the currency restrictions. It was handled the same as a means of political repression against the opposition, which the possession of Westmark was accused of a crime that drew draconian penalties.

Also a mandatory exchange was effective only in conjunction with the existing exchange restrictions. The forcibly switched exchanged East money could not be executed.

Currency restrictions in other states

These restrictions were applied permanently, while other States had resorted to the temporary use of foreign exchange restrictions. In Germany, there have been restrictions. In the context of the global economic crisis of 1931, the flight of capital and the outflow of gold were first checked, after the Second World War lasted until 1958 Ausländerkonvertibilität. With the so-called Bardepotgesetz in 1972 a partial and temporary scale restriction on capital movements has been installed.

Even in modern times, restrictions on foreign trade are viewed as an effective means. So ( 1998) and Thailand were canceled ( 2006) final, only limited foreign exchange restrictions in Japan. Restrictions on international money and capital provoke bypass transactions, such as that of cash deposits in Germany shows, because the relevant laws can not regulate all possible situations and therefore are necessary patchy.

Promotion of world trade

Foreign exchange restrictions put in floating exchange rates is a non- tariff trade barrier and that contradict the provisions of GATT. Convertible currencies are not subject foreign exchange restrictions, convertibility is the opposite of exchange controls.

Exchange controls form in international trade generally the exception. The aim of the IMF, among others the promotion of world trade, which also serves to maintain orderly exchange relations (avoidance of competitive devaluations ) and the reduction of foreign exchange restrictions. This principle also assumes the European Union, as Article 56, Section 1 of the EC Treaty ( " Treaty of Nice " ), the free movement of capital identical to Article 63 paragraph 1 of the TFEU ( " Lisbon Treaty"), formulated as follows: " In the context of provisions of this Chapter, all restrictions on the movement of capital between Member States and prohibited between Member States and third countries. " this provision is interpreted as the obligation to liberalize capital movements, including the deregulation of financial markets understood. A duty that applies not only within the EU but also towards third countries. The prohibition therefore deals with all the legal measures taken by the EU Member States that are aligned to a partial or total restriction of capital within the EU and with third countries. Trade restrictions - which are expected not just to the exchange controls - can not, however, be subsumed under this provision.

Stop transfer

The stop transfer is an essential sub-action by governments within the foreign exchange control. This stop transfer risk in turn represents a specific part of the country risk for foreign creditors dar. When foreign creditors by national governments or by resident borrowers in these countries are exposed to the risk transfer stop when a foreign government and / or central bank

• Unable (economic risk ) and / or
• Unwilling ( political risk)

Is to obtain the information necessary to repay the foreign currency debt foreign exchange foreign exchange or existing not used for repayment.

The stop transfer risk concerns in this form first of all the foreign exchange liabilities of a state or its residents, because the holdings of foreign exchange, particularly in weak currency countries is very limited and would be offset by operation of foreign currency liabilities on. But liabilities in its own national currency may be affected by the stop transfer risk, although initially it should be assumed that a state by its central bank at any time can create unlimited own currency amounts ( " put money printing machine in motion "). Apart from damaging inflationary and other economic consequences, it seems likely that the central bank is not willing to do, so the political risk would materialize.

Result is that all claims - regardless of denomination - against states or their residents are exposed to a stop transfer risk. In order to allow yet exports in particular of stop transfer risk or generally of foreign exchange control regions at risk, export credit insurers offer a hedge against such risks.