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Monday, March 25, 2013

Let the guessing game continue: The Eurogroup's mixed messages on capital controls

As we have noted at length, the capital controls are a key part of the Cypriot deal and could have a huge bearing on how and when Cyprus recovers from this crisis. Unfortunately, as with almost all important eurozone decisions, this one lacks clarity.

The body of the Eurogroup statement said:
“The Eurogroup takes note of the authorities' decision to introduce administrative measures, appropriate in view of the present unique and exceptional situation of Cyprus' financial sector and to allow for a swift reopening of the banks. The Eurogroup stresses that these administrative measures will be temporary, proportionate and non-discriminatory, and subject to strict monitoring in terms of scope and duration in line with the Treaty.”
However, the Annex noted:
“Only uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and may subsequently be subject to appropriate conditions.”
EU Internal Market Commissioner Michel Barnier added earlier today:
“Any measures to restrict or limit freedom of movement may only be enacted exceptionally and temporarily and that is what has been requested by the Cypriot authorities.”
Some pretty mixed messages. The first suggests that “administrative measures” (which is widely being taken as capital controls or related measures) will be generally applied. Bruegel suggests that this may not even need to take the form of full capital controls and could be limited to measures slowing down the movement of capital. This is contradicted by the second point which suggests they will only apply to the Bank of Cyprus uninsured depositors. Barnier’s point is closer to the first point but suggests actual controls will be needed.

FT Alphaville has an interesting run-down of the different type of capital controls and their implications. Paul Krugman makes the valid point that, if the trade-off of the single currency is reduced transaction costs in exchange for an overvalued currency, once capital controls are introduced, what is the motivation to stay inside? As he notes, wider points on the EU and access to ECB liquidity apply but it gets to the crux of the choice facing Cyprus.

As we have suggested, we find it hard to imagine that the banks could survive long without capital controls, while the economy would likely take an even bigger hit. As we have mentioned, it would fall on the ECB to continue to sanction ELA to keep banks afloat during deposit outflows, but this would amount to a large transfer of risk towards the Cypriot Central Bank (and therefore the Cypriot state, and therefore the eurozone). Meanwhile, access to the ELA is limited by the ECB’s view of bank solvency (one they have shown they may not stretch indefinitely) and assets which can be posted as collateral.

One thing that is for sure: this lack of clarity is certainly not helping an already messy situation.


Jesper said...

Banks can either be funded by liquidity (cash on deposit) or bonds. Converting some of the cash into bonds will lock that funding in for the bank. The owner of the bonds can then sell that bond for cash and transfer that cash out of Cyprus.

Selling a bond at a discount will not affect the funding situation for the bank.

In short: Capital controls can be removed if the uninsured deposits are converted to long term bonds.

Rik said...

Hard to see it working.
- The currency itself is hard 9and therefor so is cash).
- It is a cash economy and more so as from now. Who will put cash he has in the bank with the possibility of not being able to get it out.
- It is considerably corrupt and has a lot of stuff smugled in from surrounding countries. Which usually means if the routes are reversed it will be easy to smugle it out as well.
- In other words strict measures are required. Which would kill business. If things have to work, there will be loopholes and they will be used.

Via investment accounts, credit cards etc. Simply will be hard to make it work.

Starting from there banks will be 'bankjogged' and there will be huge underfunding within a few weeks. From where the party starts again.
Assets will have to be liquidated and costs reduced, but usually that goes very slowly.

Nutshell will slow things down but likley not very much, whatever the measures. Measures that will do the job will kill the economy in other ways (like high inflation), who wants to be paid in a bank that might not be there tomorrow and creates a 30-40% or more cut. You simply will price the whole thing in. From bank going bust, not being able to get to your money and use it in your business.

Rollo said...

The messages are only mixed because none of the people delivering them have the least idea of what they are talking about. Put the political class in charge of anything complex and they are lost for everything except words.

IDRIS said...

Welcome to Fantasy Land.

If it were not all so tragic for the millions of people caught up in it this pantomime would be laughable.

When did I ever see such a succession of doomed propositions? Every time Clegg opens his mouth, certainly, but other than him?)

Its complete nonsense, a huge par of Cyprus' economy hass effectively been closed down overnight, tens of thousand of job will be lost, what trade continues will be done in cash with that that means for tax revenue - and these idiots continue to meet to issue official statements that turn to ashes within days!

Not even I ever dreamed that the euro, doomed as it was from the beginning, would get this bad or that the politicians who dreamed it up to force through the power of a Single EU state they knew they could not achieve by democratic means, would continue even when millions of people are rapidly becoming destitute and tempers are nearing boiling point

As I said some months ago at your Spain, too big to fail? debate - does anyone seriously imagine that the peoples of these countries are going to accept the prospect of economic doom for a generation without (a) leaving if they can or (b) rioting if they can't?

Given all this, does Open Europe STILL think the EU can be reformed into something benign and acceptable?

If so, why?

christina speight said...

Having got Cyprus to submit to the surrender it is now clear that nothing is clear. Cyprus was unable to "read the small print" because it has not been written yet.

Not only does the EU regard it as acceptable and normal to steal the private possessions of its SUBJECTS but it is dishonest and devious in the twists and turns of its nasty mind.

The sooner Britain severs all legal connections with this monstrous dictatorship the better. It could well hasten the end of the EU altogether which would lift a curse now imposed on all Europe.

John McClane said...

I am checking the serial numbers on my €notes. I don't want them refused at a petrol station in Germany.