They’ve changed the story again. Late last week, when capital controls on banks were mooted, they were to be introduced ONLY if there was failure to agree a bailout funding arrangement with the Troika, but Cypriot politicians have now decided to introduce such controls on what they claim is a “very limited basis” even though there is now supposed to be a €10bn bailout in place. We can clearly see that they’re making it up as the go along, but it might take another few days to confirm that the Cypriot banking system is dead.
We have confirmation that Cypriot banks are to remain closed until at least Thursday; officials are referring to Thursday 28th March 2013, but the betting on here is that banks will remain closed until the Tuesday after Easter, 2nd April 2013, at which point Cypriots will not have had access to their bank counters for 16 days. Cypriots mark Good Friday 29th and Easter Monday 1st April as bank holidays.
There is now an information vacuum in Cyprus, and we don’t know how much cash has flowed out of the system already. Bank Laiki says that it has 1.35m customers and that will include corporate customers and individuals and businesses in the various countries across Europe where it operates. Limits on daily ATM withdrawals have ranged from €400 to €100. So you might have had over €500m per day withdrawn from that one bank. There is now also talk of funds being “bleeded” from foreign branches of Cypriot banks; it remains unclear if this means that Cypriot banks didn’t impose daily ATM limits on foreign withdrawals or if electronic transfers or counter withdrawals were available at foreign branches. If you were a responsible Cypriot politician then you would now be asking questions of your finance minister and governor of the central bank of Cyprus. Bad enough that your banking system is dead, in part because of actions by the EU, but worse if you have allowed the hot Russian money bleed out of the system, thereby increasing the burden on domestic depositors. Can’t Cypriot politicians do anything right? And how many Cypriot politicians have taken advantage of foreign transactions in the past 10 days?
We still don’t have details of the capital controls – you’ll find a rough English translation of the capital controls bill that went before the Cypriot parliament here – that will be imposed for what the Cypriot president and head of state has described as a “very temporary period”. We can assume that the ECB is still providing emergency liquidity assistance to Cyprus after the deadline of midnight on Monday expired for Cyprus to have a bailout funding programme in place. Last week, reports suggested the ECB had €9bn of ELA advanced to Cypriot banks, that’s likely to have increased, but how high can it go? In the case of Ireland, the ECB had advanced €190bn or 120% of GDP at the peak. 120% of Cypriot GDP of €18bn would be €22bn but with deposits flooding out at a rate of €500m per day, that limit will be quickly reached.
So, when will matters come to a head? Will the ECB balk at providing ELA beyond €22bn, which could be required some time next week? Will Cypriots kick their government out if banks don’t re-open or if unacceptable capital controls are introduced? If there is capital flight and runs on banks, how long will they last and will they break the banking system?
One thing is for sure, with the Cypriot economy heading for a nose dive, with the destruction of its offshore banking and insurance, with the damage inflicted on its banking system and on its society, little Cyprus with its 1.1m citizens and its €18bn GDP economy has been treated atrociously by its partners in Europe.