Cypriots Can Expect New Capital Controls When the Banks Reopen Tomorrow

Credit: Petros3/wikimediaCredit: Petros3/wikimediaBanks in Cyprus are expected to reopen tomorrow after being closed for more than a week. However, according to one of Cyprus’ major newspapers even though Cypriot banks are expected to reopen tomorrow there will be strict capital controls in place that will limit how much money Cypriots will be able to access and what they can do with that money.

A list of the capital controls that could be put in place can be seen on Kathimerini’s website. The BBC is reporting that the central bank has responded to the report, saying that it is based on draft proposals.

Among the most striking of the possible capital controls are bans on checks being cashed and limits to the amount of cash that individuals can take out of the country and on the spending on credit cards abroad.

Under the bailout agreement depositors with more than 100,000 euros in Cypriot banks could lose up to 40 percent of their money. The Cypriot finance minister has said that wealthy clients of the Cyprus Popular Bank could see loses of 80 percent. While those with less than 100,000 euros will not be facing such dramatic loses the new capital controls will severely restrict their access and use of their money.

Given the situation in Cyprus is should not come as a surprise that Bitcoin has almost doubled in value in about two weeks. It is especially telling that Bitcoin has recently become more popular in Spain, where people are understandably concerned about the initial bailout plan for Cyprus that would have meant all depositors would have had to contribute to a bank levy. 

Unsurprisingly, there is talk of Cyprus leaving the euro, with Paul Krugman endorsing the idea:

So here it is: yes, Cyprus should leave the euro. Now.

The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.

Krugman concludes:

Yes, it all sounds kind of desperate and improvised. But desperation is appropriate! Otherwise, we’re talking about Greek-level austerity or worse in an economy whose fundamentals, thanks to the implosion of offshore banking, are much worse than Greece’s ever were.

My guess is that none of this will happen, at least not right away, that the country’s leadership will fear the leap into the unknown that would come from euro exit despite the obvious horror of trying to stay in. But as I said, I think euro exit is now the right thing to do.

A euro exit is not only unlikely because of the Cypriot government. Many politicians and officials from other eurozone members and the European Union have a vested political interest in the euro surviving. The capital controls that will be imposed on Cypriots are only the most recent example of how resistant the European political culture is to letting a country leave from the single currency.

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  • Restoras||

    all depositors would have had to contribute to a bank levy

    Contribute? Really? Well, I guess if by "contribute" you mean "forcibly confiscated without any legal recourse" then I suppose you are right. Otherwise I think that is a choice of words the New York Times would be proud of.

  • ||

    I think what they meant to say was "all depositors would have been asked to contribute to a bank levy"

  • CE||

    Well actually, no one was asked. They were informed that they had contributed to the bank levy.

  • LTC(ret) John||

    No, they were only "asked to pay a little more" or is it "asked to pay their fair share"?

    /O!

  • The Late P Brooks||

    staying in the euro means an incredibly severe depression, which will last for many years

    But if they pull out of the euro and print beleventy bazillion "New Drachmas' everything will go perfectly smoothly.

  • Ted S.||

    Look at what happened to Iceland when it had its bank "crisis".

  • BakedPenguin||

    As much as I hate to say it, I think he's right about that. A devalued drachma would make tourism, their other main industry, quite cheap compared to other currencies and would help to get more hard currency and jobs into the economy sooner rather than later.

    Of course, the EU is going to be stupid about this whole thing and when the euro crashes, tourism will disappear, so the point could be moot.

  • Invisible Finger||

    A 500-euro-a-night hotel could become a 5000-drachma-a-night hotel. But 5000 drachma will still only get you 10 euros.

    They could just charge 10-euro a night NOW without wasting paper and ink on a new currency. The current creditors to Cyprus will just have to take a 95% loss whether they know it or not.

    In the meantime, those hotels in other countries charging the 500-(non-Cyprus)-euros-a-night are gonna be starving for tourists.

    My guess is the ECB will print to end the capital controls in Cyprus; the rate of printing is the question. It's against the treaty, but the core (sans Germany) will wind up begging for a one-time exemption. Then we'll see if Merkel can retain power in her own country.

  • Auric Demonocles||

    A 500-euro-a-night hotel could become a 5000-drachma-a-night hotel. But 5000 drachma will still only get you 10 euros.

    They could just charge 10-euro a night NOW without wasting paper and ink on a new currency.

    This is something I never really understood about currency. If their currency really becomes worth less, wouldn't they just charge more of it for the same service/product?

  • ||

    it is a house of cards.

    Everyone must inflate their currency at about the same rate....otherwise....well otherwise people catch on that governments are stealing everyone's savings.

  • Invisible Finger||

    wouldn't they just charge more of it for the same service/product?

    Yes. Why do you think you get charged more in taxes for the same government services?

    But Cyprus currency is NOT worth less as long as capital controls are in place, it is worth MORE. At least internally. Externally, with the capital control of "no currency can leave the island" you want to be paid in something other than euros-from-Cyprus because you CAN'T get paid in euros-from-Cyprus. That is a lot different than "you don't WANT to be paid in euros-from-Cyprus."

    I'm pretty sure once an internal premium on actual cash (rather than electronic transfers) is established, there will another crisis in someone's mind. Because you know a couple hundred Cypriots had euros in mattresses and the balance of economic power will shift.

    Most people forget that the euro is different for each country. So every country still has its own currency. From an electronic account standpoint there may be no difference (yet), but from a cash standpoint there certainly is. The ECB can make the Cyprus euro null and void, which is basically kicking Cyprus out of the union, or maybe the ECB can force the country to print more (which may violate the EU) because the Cyprus government will certainly want to but its creditors won't.

    The fun is just beginning!

  • GILMORE||

    In today's "Greatest International Insult on the Planet"-Edition:

    Cyprus: As Fucked as *Detroit*?

    http://blogs.marketwatch.com/t.....t-detroit/

    Somalia observed: "Oooh! That's a burn, dude!"

  • ||

    "My guess is that none of this will happen..."

    That's what I always hear myself thinking whenever I read Kruggie's predictions. Its nice of him to say it himself this time.

  • Ted S.||

    And of course people like him don't advocate the "brief sharp pain" policy for bigger economies, but the "never-ending dull pain" policy.

  • Auric Demonocles||

    I'd rather have crippling hyperinflation than an alt-text shortage.

  • LTC(ret) John||

    Agreed, I'd rather carry a duffel bag of bills to buy a burger than be shorted on alt-text!

  • Bardas Phocas||

    The capital controls are a defacto euro-exit. Capital controls fly in the face of the whole idea of currency union. They're getting a new, special, crypto-euro - good only in Cyprus. Something like a prison script.

    Maybe they can use cigarettes as a currency. They'll use something - and it won't be the controlled euro paper.

  • LTC(ret) John||

    "Something like a prison script."

    OK, that was 'take a bow' worthy.

  • Invisible Finger||

    every country's euro coin is already different. The paper currency looks the same except for the first letter which is different for each country.

    You are right though that some other commodities will be used and it will be fun/sad to see how the government tries to control it.

  • NeonCat||

    Will there be a Cypriot Georgios Baileyopolous begging people not to pull their money out, telling depositors that it's in the olive orchard, the bed and breakfast, etc.?

  • LTC(ret) John||

    Yes, and he will be bludgeoned by depositors, then shot in the back of the head and dumped in a roadside ditch by some ex-SPETSNAZ working for the Russian mob.

  • Invisible Finger||

    Krugabe is right for once.

    A euro in Cyprus is worth a lot more than a euro anywhere else. Either Cyprus notices it and begins printing their own pegged currency, or the rest of Europe will notice it and kick Cyprus out for not paying (in euros) for the foodstuffs it imported.

    God will provide. Or maybe al qaeda. How long did it take for the USSR to collapse once the first domino fell?

  • The Late P Brooks||

    Freeing themselves from the euro is absolutely the way to go, but nobody should pretend it would be painless.

    As for Krugabe, he seems to believe no economic problem cannot be solved by inflating the currency.

  • CampingInYourPark||

    Same conclusion reached here:

    http://www.independent.co.uk/v.....52256.html

    "And will these controls really last just a week? The experience of Iceland, another nation crippled by a bloated banking system, suggests not. In November 2008, it put them in place for three months. Now it has extended them indefinitely. At least the collapse in value of the Icelandic krona helped put the economy back on its feet far more quickly than everybody expected.

    But Cyprus is locked into its euro prison. In practice, not being able to get money out means nobody will put it in. So the country, already crippled by its exposure to Greece’s banks, must begin its attempts to rebuild and shrink its banks with the handbrake on because outsiders are unwilling to invest."

  • CE||

    If by "invest" you mean "deposit money in a bank so the bankers can invest it in the solid sovereign debt of Greece, Ireland, Portugal, Spain, etc. and then keep most of it later to cover their losses, while employing capital controls to keep you from withdrawing what remains, in case they need more."

  • Paul.||

    "We don't want your Deutch-ey-Markees!"

    *slams phone down*

  • Paul.||

    Yes, it all sounds kind of desperate and improvised. But desperation is appropriate!

    Do I need to read past this?

  • Tulpa (LAOL-PA)||

    Reminds me of Eric "PANIC isn't appropriate?!" Dondero back in the day.

  • CE||

    The article would be better without the reference to the obscure experimental currency BitCoin.

  • Paul.||

    When civilization collapses, bitcoin will be how we do business.

  • Invisible Finger||

    Even when Krugabe is right, he's still wrong.

    No matter which currency Cyprus uses, the depression will happen and be of the same length regardless. Debts took a severe haircut and capital will not flow until trust is restored. Printing different pieces of paper "just for Cyprus" isn't going to restore ANY trust to the populace as a whole.

    Printing new money MAY restore trust or at least confer economic advantages to the first receivers of new currency, but that will only accelerate the wealth divide. So you'll get macroeconomic recovery but 80% of the population will be even worse off than today.

    Paul Krugman: The conscience of a liberal with the brains of an ice cube.

  • Restoras||

    Hey, ice cubes actually serve multiple useful purposes in this world, whereas Krugabe's brain serves none whatsoever.

  • NeonCat||

    Keeps there from being a weird whistling noise whenever he's being interviewed. It would be really distracting to the viewers at home.

  • ||

    the depression will happen and be of the same length regardless.

    The recent history of Iceland disagrees with you.

    The process can be sped up and its impacts limited....which is to say don't intervene when markets change the value of currencies and debt.

  • Invisible Finger||

    I'm pretty sure it DOES agree with me. Cyprus has pretty much been forced to TAKE the Iceland solution.

    It was a four-year crisis for Iceland, and for the plebes the capital controls are still in place. They decided to take "a more severe, shorter depression" than a "bailout loans and a longer slide into depression" which is apparently the deal the PIIGS took.

    Then again, the PIIGS are part of the EU and Iceland is not (yet). So the pressure put on them to take bailout loans wasn't as great. You can say Iceland has recovered from a macro standpoint, but the inhabitants may disagree with you.

    http://www.irishtimes.com/busi.....-1.1319615

  • ||

    I've been wondering: do Cypriots not own debit cards? Were I a Cypriot bankholder, I'd just buy all the gold I can using my debit card minus a bare minimum to live on and then resell when the mess is over.

  • Paul.||

    If you were a gold seller, would you accept that debit card?

  • robc||

    Sure, until I ran it thru the machine and the transaction failed.

  • Paul.||

    Good point. I should have asked, "If you were a gold seller, could you accept that debit card?"

  • robc||

    Not this week.

  • robc||

    Debit cards dont work when the bank is closed or only work to a limited amount when capital controls are in place.

  • Invisible Finger||

    The time to do that is BEFORE severe capital controls are in place. Now you better have cash if you want to buy gold. It will be interesting to see how much of a premium cash buyers can get in Cyprus now.

    Capital controls are in place in the US, too; try to spend 10K in currency all at once and see what happens. Shit, we have idiots like Krugabe begging for "wealth taxes" which are the same damn thing as capital controls.

  • phandaal||

    GREEK LEVEL AUSTERITY! Poor Krugman.

  • robc||

    Yeah, that sentence was hilarious.

    Still Krugabe is right (if for the wrong reasons) about Cyprus leaving the Euro.

    Maybe they could then try Estonian level austerity, so that Krugabe could lose another twitter war.

  • buybuydandavis||

    What I want to see is a bank audit of those large accounts that were liquidated in the last month.

  • Tulpa (LAOL-PA)||

    No one has yet answered my very simple question: how the FUCK did a country which has state run media and doesn't actually control a third of its claimed land area get in the EU in the first place? Forget exiting, why wasn't Krugman arguing against their entering the euro back in 2004?

    I'm also curious to see how Cyprus plans to enforce capital controls along its only land border -- the one shared with a country that it doesn't recognize the existence of.

  • Invisible Finger||

    I would think state-run media would be a requirement to join the EU. Central planning is Krugabe's wet dream, the more central the better the orgasm.

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