Counterparties: Cyprus births controls
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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:
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