March 27, 2013
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.Author : Open Europe blog team