Russian Roulette 2

Cyprus’s banks will open their doors to customers today, for the first time in almost two weeks, with new rules curbing access to cash and other capital controls. The main restrictions being as follows:-

  • All savings accounts must run until their expiry date – no early withdrawals allowed.
  • No cheques will be cashed, although cheque deposits will be allowed.
  • Payments out of the country are suspended. Individuals will only be allowed to take €3,000 (£2,500) in cash on each trip out of the country.
  • Unlimited use of credit cards is allowed within Cyprus, but there’s a spending limit of €5,000 a month abroad.
  • Import payments will be allowed when ‘the relevant documents’ are provided to the authorities and Cypriots can only transfer up to €10,000 a quarter for fellow citizens who are studying abroad.
  • The measures will apply to all accounts, regardless of the currency used.

The banks will open at noon Cyprus time but close at 6pm local time, with the controls remaining in force for seven days, according to a statement from the Finance Ministry, although in reality they are likely to last for much longer, possibly months if not years, despite EU regulations which state such impositions can only apply for a maximum of two weeks.

The restrictions aim to protect the country’s financial industry, while trying to uphold the principle of free movement of capital within the EU,” according to a central bank spokesperson, whilst in reality in drives a coach and horses through the EU treaty on the free movement of capital and will further damage Cyprus and the wider Euro-Zone, as trust has taken a major hit.

Controls were introduced in Iceland back in 2008, following a similar collapse of its banking system, which at the time represented 10 times GDP compared with eight times in Cyprus (incidentally it’s five times in the UK,) with many citing the successful recovery seen in Iceland, including a recapitalisation of the banking system which is now at a “mere” twice the size of GDP. The reality, of course, is that Iceland had its own currency, the krona, which very quickly slumped, allowing its second main driver to the economy, tourism, to soar. A glance at Iceland’s GDP versus its currency value, shows the result of the latter’s depreciation.

weekly_blog_130328_1

The currency value has been inverted to make it easier to see the relationship between the two. Pre-bust, during the latter stage of the banking boom, the currency appreciated by about 40%, only then to collapse by 60% as the economy imploded. Note the return to positive GDP.

Tourism is now the largest sector of the Cypriot economy, as the former number one, banking, is toast, but neither it nor the wider economy will benefit from any devaluation as it remains within the strait-jacket of the Euro.

None of these depositors will be happy about the lock down, particularly those with deposits of more than €100,000 who are about to take a “hair-cut” of up to 40% and in due course possibly more.

They will also wish to know more about the, “smart money,” that exited the deposit system just months before the proverbial hit the fan. As can be seen from the following chart, courtesy of Bloomberg, deposit growth has been negative for eight of the past 10 months, with a particular increase in withdrawals, some €2BN during the 3 months to the end of January 2013.

weekly_blog_130328_2

Any investigative journalist worth his or her salt could ascertain if the “smart money” included any of the political elite, as surely in these days of, “fairness,” hammered home so often by policymakers of late in respect of the sharing of austerity pain, it’s in the public interest to know, or at least that is how the Cypriot’s will see it.

Either way, the Cypriot and EU authorities state that the capital controls will alleviate a frightening “run” on banks and in the shorter term they may be right as, due to the controls, it will be more like a “trot.” However, this latest twist in the “debt deflation” response will increase suspicions and invoke less trust of the wider banking system and of policymakers in general, which will surely compound the future problems and pain and not be what the policymakers intended.

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