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.
Normal reactions, my guess:
ReplyDelete-Internally gigantic move to cash (which will do a lot of harm to the banks).
A Cyprus bankEuro will be worth less than a Cyprus cashEuro will be worth less than a non-CyprusEuro. The direction is clear.
-Internationally. Stuff en masse will be smuggled out. Structures are in place only have to be changed from inbound to outbound. And paper Euros are accepted everywhere.
Might get stronger controls lateron as a consequence of the above. As the above is nearly certain to cause a new bankingproblem (huge liquidity problem to start with, subs funding, capital, costs) and subsequently a Cyprus 2.0.
Looks like we are lifting Cyprus up, up, up to the level of Argentina.
ReplyDeleteIt would be interesting to find out how many of the ruling elite in Cyprus still have their money in Cyprus, if, of course, it ever was. More likely to be in Luxembourg with Barroso's
ReplyDelete