Economically and politically, it is sensible for Cyprus to remain within the euro and to repair its banking system as soon as possible. But as banks re-open in just under an hour, Cypriots who have been without a counter service for 12 days are set to mob banks, seeking the maximum daily withdrawal of €300, compared to €100 at ATMs. After all, a 40% haircut on €100,000+ deposits at Bank of Cyprus and 80% at Bank Laiki might just be the first steps with dealing with the crisis. Next week, the authorities might target other banks and co-ops and they might even target sub-€100,000 deposits, after all they have form and agreed to impose levies on such deposits a fortnight ago.
Reporting across reliable old media indicates that customers will today face a counter withdrawal of €300, there is a €1,000 limit on cash taken out of the country – yes that’s just 2 x €500 notes – the cashing of cheques is banned outright, use of debit or credit cards outside Cyprus is limited to €5,000 per person per month, businesses can make payments of €5,000 per day, and there is a state committee that would make North Korea proud which will approve business payments of €5,000-plus.
Human instinct would indicate people will withdraw the maximum from their accounts amid the instability and out of concern that the authorities will return for a new dip into their deposits, and there will be maximum attempts to bypass the capital controls as households and businesses consider their own welfare. Sadly the ECB is a secretive organization, so we shouldn’t expect updates on additional funds provided by the ECB to Cypriot banks, unless the news is good. Latest figures from the ECB indicate that €9-10bn of emergency liquidity assistance was provided by the ECB to Cypriot banks on 15th March 2013.
The estimation on here is that over €500m a day can be withdrawn from the Cypriot banking system and if that continues, then it will be the week after next when the ECB shouts halt to its provision of assistance at which point, ECB exposure to Cypriot banks might be €27bn, that in an economy of €18bn GDP.
Will Cypriots remain irrational a lot longer than banks can remain solvent? The betting on here is yes.