EM Yield Chasers In For Rude Awakening—IMF Supported Capital Controls

Investors must not be surprised if an IMF bailout package contains capital controls and the IMF goes from enforcing your rights to stripping you of those rights. Capital controls lock investors into a pot of assets denominated in one currency, and thus leave them at the mercy of the government policies of that particular jurisdiction. Capital controls have been the first step in the process through which wealth is re-assigned, whether through inflation or more directly, from the private sector to relieve the debt burdens of the state. Importantly capital controls destroy liquidity in assets increasingly held in open-ended structures offering daily redemptions in developed world currencies. We cannot know when the IMF will finally endorse the use of capital controls as part of a bailout programme, though it is worth noting that the IMF worked as part of the troika in Greece keeping in place capital controls originally imposed by the Greek government.