The Cypriot parliament has been debating new bills aimed at meeting the ECB requirement to have a sound funding plan in place by midnight on Monday next 25th March 2013 (otherwise the ECB will call in its emergency liquidity assistance, apparently). The bills are really just re-arranging deckchairs on the Titanic and the notion that Cypriots would en masse contribute to a solidarity fund or that due diligence could be undertaken on a ragbag of assets including natural gas in disputed maritime waters or that splitting a bank into a good and bad part solves the underlying insolvency, is all laughable. The betting on here is that it will be tomorrow Sunday when the politicians in their Ivory Tower of fantasy sophistry will begin to realize that the trust of citizens in the banking system has been lost and that depositors will withdraw the maximum sum allowed as soon as banks re-open. And no amount of deck-chair rearranging will change that.
So, the main curiosity at this stage is what capital controls Cyprus will impose on its depositors. At this stage, we really don’t know what the details are but it is probably safe to dismiss the claim from Cypriot politicians that capital controls would only be introduced if a funding package has not been agreed by Monday. Because, even if Cyprus could convince the EU to part with €10bn by Monday evening, there will still be a flood of withdrawals if banks are re-opened as normal on Tuesday, and the funding requirement on Monday evening would have changed utterly by Tuesday evening.
So, for now, we have a Bill – there’s a leaked Greek version going around someplace – which gives the governor of the central bank of Cyprus and the finance minister the authority to introduce capital controls in the national interest. The precise details of any capital control are omitted from the Bill.
The capital controls MIGHT impose withdrawal limits from bank accounts, but how will the controls distinguish between a business withdrawing €10,000 from its €30,000 balance to pay rent, wages and suppliers and an individual withdrawing €10,000 to stick in a mattress or home-safe? And if you can differentiate between consumers and businesses then what limit do you place on consumers, and how do you stop every consumer withdrawing right up to the general maximum? Figures for withdrawals over the past week are not available but if you have customers in Cyprus and overseas withdrawing maximum ATM funds from Cypriot accounts, there could well be €300-500m withdrawn in every 24 hours or €3-5bn in the 10 days that the banks will have been closed by next Tuesday. Pretty soon, even these limited ATM withdrawals could eat into the c€70bn deposits in Cypriot banks.
Capital controls might also try to stop people moving euros from Cyprus to other countries. But given the porous border between north and south Cyprus, the official presence of Russia and NATO on Cypriot soil which means planes taking off with a few hundred million euros might be difficult to stop, how effective can such controls be? And even if there are serious penalties, will people take the risk rather than be left with a currency that they could be forced to exchange for a Cypriot pound which might decline by 50% in value in the next few weeks? In other words, people are unlikely to recognize the trust element in these laws when faced with dire financial consequences and the reality of the past week.
Beyond normal households and businesses though, what of Cyprus’s colossal offshore banking and insurance industries. Will capital controls signal the death knell of these businesses, which will just relocate to Malta, Monaco, Gibraltar, Liechtenstein or the Channel Islands? Or even to Dublin? Limossal by the Liffey?
There isn’t likely to be much detail forthcoming on capital controls today because (a) the Bill doesn’t make them explicit and (b) politicians will want to downplay any new measure which will frighten households and businesses more. But it’s all irrelevant anyway. What we want to know is Plan C and the reintroduction of the Cypriot pound and the re-establishment of an independent central bank of Cyprus.
UPDATE: 23rd March, 2013. Thanks to Dorothy Jones below for giving what is likely to be many perspectives on the precise nature of Cyprus’s new capital controls. A German economist, deemed worthy enough by respected newspaper Handelsblatt, has called for cepital controls to include a provision whereby citizens will only be allowed withdraw from the banks that which is absolutely necessary for survival. Yes folks, we’re practically back at Lord of the Flies level of civilisation!
UPDATE: 24th March, 2013. With many thanks to John Gallaher for what looks like a readable translation (it’s not perfect but generally makes sense) of the capital controls bill presented to the Cypriot parliament last Thursday 21st March 2013. The translation is here.