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):

A statement by the Central Bank of Iceland dated July 2009:

“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....

Cyprus closes the shutters as it announces capital controls

Some more details coming out about the much talked about capital controls in Cyprus (details via @MatinaStevis and RANsquawk):

• Will include limit on cashing cheques (but will be able to deposit cheques).
• Time fixed deposits will not be able to be redeemed during the period of capital controls
• Credit card transactions capped at €5k per month
• Limit to cash transfers outside Cyprus of €3k per person per trip.
• Applies to all bank accounts
• Valid for 7 days from Thursday, will then be re-evaluated.

We have already noted that these controls are pretty severe and have the potential to have a substantial impact on the economy. Below we list a few more thoughts:

• The fact that they are focused on limited external flows rather than internal transactions could be positive as it may help avoid a massive liquidity crunch in Cyprus.
• That said there could still be a very quick withdrawal of funds from banks, with people keen to hold cash instead. This could further destabilise the banks.
• Removal in 7 days seems optimistic, for two reasons. Firstly, the bank restructuring and recapitalisation may not be completed by then. But more importantly, the fears which would motivate massive outflows go further than just the banks. People will look to move money out of Cyprus because the financial sector has been massively shrunk and no longer looks an attractive investment. Furthermore, the economy looks consigned to a long period of economic contraction and its debt load may quickly become unsustainable. Lastly political unrest may grow. None of these motivating factors will be gone in a week.
• The lack of limit on cash withdrawals is a positive, although this could quickly change, especially with demand for cash likely to sky rocket.
• Many companies still use cheques in Cyprus, not least to pay employees, so limiting them could hamper the normal functioning of business. That said, since they can be deposited, this is mitigated a bit, although that only holds as long as people trust that they can access deposits - not clear they do at this stage.
• According to this via Zerohedge, any commercial transaction above €500 which sends money abroad will need to be proven to be in line with usual business practice. This will introduce a significant amount of time consuming paper work into the life of many everyday exports and importers. 

We’ll update the blog with more thoughts as more details become clear.

Rewarded for being completely wrong

Emerging from his bureaucratic hole in Brussels, former Labour MEP Richard Corbett made an appearance on yesterday's Newsnight to discuss the ongoing eurozone crisis (joined by a Greek communist and Tory MP Douglas Carswell - the discussion wasn't exactly smooth). Corbett is one of those old EU federalists still hanging around and clinging on. Having lost his MEP seat in 2009, he now works for EU President Herman Van Rompuy. And last night Corbett did his best to keep up the appearance that he hadn't been completely found out by the eurozone crisis. You almost felt a bit of sympathy for him as he tried to explain "actually the euro as a whole is strong."

Corbett, you see, is a strong contender for the not so flattering prize of "the worst eurozone prediction ever" (and keep in mind that the competition is pretty tough). In 2009, Corbett kindly informed readers of the Bradford Telegraph that,

"The euro has been a rock of stability, as illustrated by the contrasting fortunes of Iceland and Ireland. Joining the single currency would be a major step."

Right Richard. Fast forward to 2011.
Iceland's borrowing costs (10yr bonds): 2.9%
Ireland's borrowing costs (10yr bonds): 12.3%

For his profound knowledge of economics and monetary policy, Corbett now holds a position in Van Rompuy's court, as an "adviser" to the Man himself.

Why does that make us feel even more nervous about the future of the euro?

"You may not trust the people, but we do"

Iceland's President Olafur Ragnar Grimsson appears to be a giving a rather strong 'two fingers up' to Britain and the Netherlands at the moment, by refusing to sign the 'Icesave' bill, sending it to the Icelandic people for a referendum instead. The bill in question would see Iceland pay Dutch and Britain savers £3.6 billion in lost deposits from the collapsed bank Icesave, and take on a debt worth around 40% of Iceland's GDP in 2009, equivalent to around 12,000 euros for every Icelandic citizen.

Speaking to Newsnight last night, President Grimsson said "You have to trust the democratic process. You see in France, in the Netherlands, in Ireland, in many European countries, referendums are a normal part of the democratic process."

Is it a coincidence that he selected three countries which chose to ignore the outcome of their referendums on the Lisbon Treaty? They are not the only EU countries to have ever held referendums - so we suspect that by flagging up those three, President Grimsson is making a rather pointed comment, something along the lines of: "just because the EU is afraid of referendums, and chooses to bulldoze over the will of its people, does not mean that Iceland will do the same."

He went on to add, "I know in Britain you don't really have the experience of trusting the people with a referendum, but all over Europe there are countries that trust the people with a referendum."

Hmm...you don't have to be Alan Turing to decode that one either: "Just because Britain reneged on its promise to hold a referendum on the Lisbon Treaty because it didn't think it could trust the people to vote in the 'correct way' doesn't mean we will do the same."

Meanwhile a new poll out today from MMR has found that 58% of respondents in Iceland said they would vote against the bill in the upcoming referendum, to be held on 20 February, and 42% said they would vote in favour of it. Will the polling numbers remain like that? Possibly not. Iceland might see the same not-so-subtle pressure applied to it that Ireland did (in Lisbon Mark II). See comments from Lord Myners yesterday, threatening Iceland with being frozen out of the international financial system, and not being allowed to join the EU, although following it with a "I don't think it's a case of us having to warn them...The Icelandic Government recognised that this was the case."

In all honesty, the EU might have to think twice about extending membership to a country that trusts the people and is willing to put an issue like this to the test.

Commission looks into Icelandic insurance scheme

A report in today's Guardian suggests that Iceland will be put on a fast track for EU membership in order to save the country from financial ruin. The article notes that an Icelandic membership application would be viewed favourably by the Commission, with Enlargement Commissioner Olli Rehn saying he hopes Iceland can join with Croatia, probably by 2011. This would accelerate a process that usually takes several years.

So, is the Commission really Iceland's knight in shining armour? Or, is there more to it?

This story from Euractiv would suggest there is.

The issue, once again, is ratifiaction of the Lisbon Treaty. The deal struck between EU leaders last December for Ireland to hold a second referendum on Lisbon, envisioned Irish 'assurances' being tacked on to Croatia's Accession Treaty in order to give them legal force. This would avoid the EU's other 26 members having to re-ratify an amended Lisbon Treaty.

However, Slovenia has put a spanner in the works by threatening to veto Croatian accession due to a long-running border dispute.

This will understandably be unnerving Irish PM Brian Cowen who may be faced with a situation where he has to ask the Irish people to vote again on Lisbon but with no prospect of their hard won assurances ever having legal effect.

Then along came Iceland and the economic crisis.

A source from DG Enlargement reportedly told Euractiv that Iceland's membership bid "could play the role of a spare wheel" in the EU's attempts to push through the Lisbon Treaty. Fast track Icelandic membership will therefore act as insurance if Croatian accession continues to prove difficult and EU leaders will be able to reassure Ireland that their 'assurances' will be given legal effect one way or another.

As is often the case, there is more to EU politics than meets the eye.