Counterparties: Cyprus births controls

By Ben Walsh
March 27, 2013

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Today, Cyprus announced it will impose capital controls restricting where, when, and how depositors can access and use their money. Here are some of the things depositors won’t be able to do when the banks open in Cyprus tomorrow:

  • cash a check
  • withdraw more than €300 a day
  • take more than €3000 in cash per person in any currency out of the country
  • purchase more than €5000 in foreign goods and services with a credit card each month
  • Make non-cash payments outside Cyprus without documentation showing they are paying for imports

These restrictions are intended to last for seven days, but Hugo Dixon doubts they’ll be that short-lived. In Iceland, capital controls have been in effect for seven years, and will stay in place for at least another two.

We’ll know for sure what an economy under these restrictions looks like when banks open tomorrow for the first time in ten days, but it’s pretty far from a modern, functioning economy. As far as the euro goes, David Keohane says the clear-headed thing: capital controls obviously “make a mockery of the idea of a currency union”.

Cardiff Garcia looks at at a meta-study on capital controls and finds that only once — in Malaysia — were they effective. In that case, the controls were “accompanied by aggressive counter-cyclical spending, bans on short-selling the currency and trading it offshore, and defending the ringgit against speculators by fixing it to the dollar”. Those things aren’t happening in Cyprus and won’t be.

Paul Krugman thinks the only way forward for Cyprus is a euro exit. Unfortunately for its citizens and economy, he doesn’t think it will come anytime soon.

All of which means that in Cyprus, a cash-stuffed mattress is once again the ultimate safety net. — Ben Walsh

On to today’s links:

EU Mess
Cyprus’s economy could shrink by as much as 20% from 2013-2015 – Institute for International Finance
Greece’s growth forecasts are again looking too rosy – FT Alphaville

Real Talk
Why a country is not a household: “The fed is much better off when it is short on cash” – Helaine Olen

At least eight federal agencies are investigating JP Morgan – DealBook

How the London Whale trade could have been stopped: Liquidity provisions – Rhymes With Cars & Girls
Global banking’s post-crisis legal tab will soon surpass $100 billion – WSJ

Talking Your Book
High-speed trading totally fine, says Columbia researcher financed by high-speed trading firm – HuffPo

Long Reads
“What are foundations for?” – Rob Reich

Tough Choices
Faster smartphones, or better battery life? – Farhad Manjoo

For the Record
Wells Fargo: The Harlem Shake is inconsistent with our image – Channel 11, Atlanta

Fiscally Speaking
Gay marriage could save the Federal government $450 million a year – Josh Barro

Says Science
Organic food extends the lifespan and fertility of the fruit flies – Atlantic

Negative Indicators
Companies that favor bullish analysts on earnings calls are more likely to restate earnings – WSJ

“Syncing to paper is no more complicated than it sounds” – Robert Grerner

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They should have gone with Russia. They’re going to be crushed.

Posted by jomiku | Report as abusive

The New Economy:
Dear Sir:
We have 43 million in Cyprus bank accounts and need your help to help us get it out of the country. You will be richly rewarded for your assistance. Please provide your contact info so we may begin.

Posted by MyLord | Report as abusive

Cyprus needs to start printing millions of Cyprus Euros and declare them equal in all respects. Then tell depositors they can move as many abroad as they wish. Who is to say they are not as good as Euros printed in Germany? With those Euros in hand Cyprus can go on its merry way and stop being the victim.

Posted by Chris08 | Report as abusive

@Chris08 For better or worse, that’s not how it works. Read up in Target2 et. al.

Posted by dandraka | Report as abusive

@dandraka. Sure it’s working so well now, why do anything different? Pretty soon all will be well, right? Krugman, dumb Nobel Laureate, advocates an immediate exit from the Euro to save time and reduce misery. I guess Germans love to see the rest of Europe wallowing in the misery they are causing. You too?

Posted by Chris08 | Report as abusive

So I wonder if Felix’s opinion of Robert Reich will drop because Reich uses the “comparing an asset stock versus an income flow” fallacy in his piece about foundations – “The assets of the Gates Foundation and a separate Gates Trust, which holds wealth donated by the Gates family and Buffett, together total more than $65 Billion. If the combined entities were a nation, it would be 65th on the world GDP list.”

That, of course, is not true because the assets of foundations would not produce $65 billion of goods and services each year. IIRC, the false comparison of assets to annual GDP is one of Felix’s pet peeves.

Posted by realist50 | Report as abusive

in Italy from this year on banks will report to fiscal authorities every year for every client all bank account and title deposit movements and also the number and date of accessess to safety-deposit boxes. I’d say everything is in place for the next step.

Posted by hansrudolf | Report as abusive