Cyprus unveils radical capital control measures
Move geared towards stemming capital flight ahead of troubled banks reopening
A European Union flag ablaze during an anti-bailout rally outside the presidential palace in Nicosia yesterday. Photograph: Yannis Behrakis/Reuters
Cyprus yesterday unveiled radical capital-control measures ahead of banks re-opening today, the first time a euro zone country has restricted movement of the single currency.
Under the rules, which are designed to curb the exit of deposits out of the country when banks re-open this morning, the use of credit and debit cards overseas will be restricted to €5,000 per month, while individuals will be permitted to take a maximum of €3,000 in cash out of the country.
The new rules will also severely affect businesses. Companies who buy products from abroad will have to provide official written documentation to access the cash needed.
While the measures, facilitated by new legislation rushed in last week, seek to control the amount of money entering and leaving the country, it is not intended to prohibit the movement of the currency within Cyprus.
The unprecedented move is a first for the currency union. While countries such as Argentina and Iceland have introduced similar measures, this is the first time a country will prohibit the movement of the euro inside and outside of its borders. In contrast to the Argentinian and Icelandic scenarios, this means that money exiting Cyprus will still hold its value in other jurisdictions. According to some analysts, this is effectively devaluing the euro within Cyprus.
The Cypriot banking system has remained shut for almost two weeks.
The capital control measures come into the force against the backdrop of a radically restructured banking sector which forms the centrepiece of the revamped rescue package for the stricken country agreed on Monday.
The €10 billion rescue plan for Cyprus will mean the country’s second largest bank Laiki close and Bank of Cyprus, the country’s biggest bank, recapitalised and restructured.
While deposits under €100,000 will be protected under the new scheme, finance minister Michalis Sarris said deposits above €100,000 could lose 40 per cent of their value, while some investors might only get back one-fifth of their savings. Many of the larger depositors are Russian.
The exact scale of the deposit “haircuts” will be revealed when the bank resolution process is completed in the coming weeks.
According to estimates from Barclays Capital and SocGen the bailout could reduce Cyprus’s gross domestic product by 20 per cent by 2017. The Mediterranean island’s economy is highly dependent on the financial sector.
Any outflow of deposits will have an impact on the European Central Bank which pledged earlier this week to provide liquidity to the Cypriot banking system.
Meanwhile, financial markets continued to digest the fallout from the bailout amid concern that the rescue plan would act as a model for resolving future banking crises.
The euro fell to a four-month low and stock markets fell as financial markets awaited details of the capital control measures which emerged after European markets closed yesterday evening.
Political uncertainty in Italy also weighed on market sentiment. At an auction of Italian five-year bonds yesterday, borrowing costs rose for the Mediterranean country which is still in a state of political limbo following last month’s inconclusive election. Yesterday, the anti-establishment Five Star Movement refused to back the centre-left Democrats request to form a minority government, refocusing investor attention back on to Italy.
The unprecedented move to “bai-lin” depositors as part of the Cypriot rescue package has unsettled investors. While the ECB moved to clarify comments made by euro zone head Jeroen Dijsselbloem that Cyprus could act as a “template” for future bank rescues, the Dutch finance minister’s assertion that future bailouts would move the burden away from the taxpayer and on to the private sector indicates a change in euro-zone policy. The inclusion of bail-ins’ for depositors and bondholders is expected to form part of the Europe-wide bank resolution legislation that is making its way through the EU.