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Wednesday, March 27, 2013

When months turn into years...

About those "temporary" Cypriot capital controls:

From Iceland’s letter of intent to the IMF dated November 2008, highlighting the intention to remove capital controls “as soon as possible” (click to enlarge):

“In order to remove the capital controls in a gradual, sequenced manner without inducing instability, it is necessary to reduce uncertainty about and create sufficient confidence in the economic programme. Many important steps have been taken in this direction in the recent term. These should make it possible to begin lifting the controls in the next few months.”
Yet four years on, capital controls are still going strong....


Anonymous said...


This time around it may be much more difficult to do because it's the same currency. I expect this attempt to last shorter because it will fail miserably.

I blogged (URL below) about a very easy workaround: Cypriots who want to stuff their mattress should pull out all their savings and convert them into non-Cyprus-backed euro banknotes.
Let's see whether the customers will dare to start discriminating between euro banknotes based on their serial numbers...


jon livesey said...

But, but, but. Iceland is this huge honker success and a role model to us all! I am sure I read that somewhere.

Rik said...

As Anonymus remarks the dynamics are completely different as it involves a widely used currency now.

With Iceland it was one of the main drivers of the devaluation. Which moved roughly in the same pace inside and outside the country. Who outside of Iceland wanted to have tanking Kroner. You basically had to bring them back.

With Cyprus a CyprusCashEuro will be worth more than a CyprusBankEuro. Simply because the bank can go bust and there are much more limitations in the use of the CyprusBankEuro.
And any Euro inside Cyprus is less worth than a Euro Outside. And likley with a consideable margin The government can go back to the Pound (aka devaluation), a new levy, all sorts of limitations, security issues etc.

That will remain a structural issue in Cyprus while In Iceland a new equilibrium could develop.

At the end of the day if costs to get money out are lower than the costreduction because of the control the push is out. And it will remain out until the normal way of doing business and have a life in Cyprus becomes so much more inconvenient because of the outflow that people stop nett exporting. But it is easy to see that nearly all savings will not be in that convenience to keep part. And those savings are the bankliabilities.

A much more dodgy region where smuggle and corruption is the norm. But especially the structural push to take money out (cash or out of the country, but anyway out of the banks) will be difficult to tackle. And the heavier measures that will be put in place to battle that will make normal business more and more difficult. Shoot yourself in the right or in the left foot, but in a foot it is.