Cyprus’ capital controls are an “omnishambles”. If the Argentine-style “corralito” really can be lifted in seven days, the damage could be contained. But that doesn’t seem credible. Extended controls could spawn bribery, sap confidence, further crush the economy, spread contagion and ultimately lead to the country’s exit from the euro.
The lesson of capital controls elsewhere is that, once they are imposed, they are hard to remove. Iceland’s curbs are still in place five years after they started. In Argentina, they lasted a year.
There’s little reason to suppose it will be much different in Nicosia. After all, the restrictions – which limit both the amount of money people can take from their banks and the amount they can transfer abroad – have been imposed because the lenders do not have enough access to ready funds. If there’s not sufficient liquidity today, why should anybody believe there will be enough in a week, a month or even a year?
The shambolic manner in which the restrictions have been implemented also rams home the fact that it’s unlikely they will be lifted quickly. An earlier leaked draft didn’t mention any daily limits on cash withdrawals; the final version set it at 300 euros per person. The draft said people could take 3,000 euros abroad per trip; in the end, it was cut to 1,000 euros.
A central bank spokesman said the controls would last four days; in the end it was seven, although the central bank’s own press release didn’t even mention a timetable. The tightening of the controls between the leaked draft and the final version might suggest that liquidity is in pretty short supply.