March 28 2013

Capital controls in Cyprus will intensify the slump while severely damaging the credibility of the euro. The idea that the single currency would rival the US dollar as a secure store of wealth has taken a pasting as a result of the disastrous handling of Cyprus…

Powered by article titled “Demolishing some myths about the single currency” was written by Larry Elliott, for on Wednesday 27th March 2013 22.29 UTC

The introduction of capital controls in Cyprus is a textbook example of shutting the stable door after the horse has bolted. Rich Russians and wealthy Cypriots knew the crisis was coming and have had the best part of a fortnight to spirit their money out of the country since it broke, even assuming they did not do so beforehand. The restrictions will intensify the slump Cyprus faces while not removing the risk of bank runs when branches finally open for businesson Thursday. What’s more, the controls severely damage the credibility of the euro.

That’s not to say the controls are unnecessary. Even with the severe restrictions announced in place, there is a possibility of bank runs. Without them, bank runs would be a certainty. Modern banking is essentially based on a sleight of hand under which banks have readily available funds that are only a fraction of their total deposits. If all the customers demand their money at once, as would be the case in Cyprus without controls, the banks go under.

The government in Nicosia insists capital controls will be removed within a week, but that looks as heroic an assumption as the idea that the economy will shrink by just 3.5% this year, the current EU forecast. Iceland introduced capital controls in 2008 and still has them in place. There will no doubt be pressure from Brussels on Cyprus to lift the controls as quickly as possible, but most analysts expect them to be in place for a minimum of six months.

As far as the real economy is concerned, Latvia – which had pegged its currency to the euro – suffered an 18% contraction of its economy following a banking collapse. And bank deposits were just 100% of GDP in Latvia; in Cyprus they were 800% of GDP before the crisis. To sum up, Cyprus is going to have a collapsing economy buttressed by capital controls, but unlike Iceland will not have the option of devaluation to make itself more competitive. Speculation that it will become the first country to leave the euro will not go away. Indeed, it will intensify the longer the capital controls are in place.

There are, of course, wider implications for Europe despite attempts over the last week to say that Cyprus is a special case. When the euro was created just over a decade ago it was supposed to embody certain principles. One of those principles was that a euro would be a euro anywhere inside the single currency zone. That has now been violated; a euro in Nicosia is not worth the same as a euro in Berlin.

A second trait of the single currency was that it was supposed to be a secure store of wealth. International investors would have confidence in it and it would rival the dollar as a global reserve currency. That idea has also taken a pasting as a result of the disastrous handling of Cyprus; the decision to make deposit holders pay a share of the bailout has been accompanied by a fall in the value of the euro against the dollar. That’s hardly surprising; savings in US banks are perceived as rock solid whereas those in eurozone banks are not.

A third core belief was that the euro would lead to economic convergence, with the weaker and poorer countries raising their performance to the level of the rich nations at the monetary union’s core. This has looked increasingly absurd against a backdrop of bailouts for Greece, Ireland and Portugal, and the chronic lack of competitiveness displayed by Italy, Spain and – more recently – France.

So Cyprus has put two myths to bed. One is the myth of convergence; the other is that the debt crisis is over. A new chapter has opened, that’s all. © Guardian News & Media Limited 2010

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Banks in Cyprus opened their doors again. The ECB says Cyprus deposits fell in February. Stock market in Cyprus abandons plans to reopen today. Withdrawals limited to 300 euro per day and no more than 1000 euro to be taken out of the country…

Powered by article titled “Cyprus crisis: banks reopen after tough capital controls agreed – live” was written by Graeme Wearden, for on Thursday 28th March 2013 13.28 UTC

1.28pm GMT

From Nicosia, Associated Press reports that Cypriots formed ‘large but orderly lines’ to get into banks which have been closed since Saturday 16th March.

People filed calmly into banks across the country once they had opened, and no crowd issues were reported….

Although people were calm, there was also concern that the restrictions on withdrawals (people can only get €300 per day) would be disruptive:

In Nicosia, one 70 year-old pensioner who only gave his name as Ioannis arrived at the bank some two hours ahead of the scheduled opening time.

“I had to come this early, I came from my village 20 kilometers away, what do they want me to do, keep coming and going?” he said

1.14pm GMT

Here’s a gallery of photos from Cyprus so far today: Cyprus banks re-open – in pictures

1.04pm GMT

Passengers at Larnaca airport are warned that they cannot take more than €1,000 out of Cyprus, under the new rules on Capital Controls announced last last night (see details here).

1.00pm GMT

There was quite a queue outside this branch of the COOP Bank in Nicosia today.

Worth noting that not everyone has turned up at the bank to access their savings – some have said they were actually paying money or cheques in.

12.52pm GMT

Relive the crisis

The eurozone has now been locked in a crisis for three and a half years, since Greece first admitted that there was a black hole in its accounts.

Since then we’ve seen five rescue packages (Greece, Ireland, Portugal, Spain’s banking sector, and finally Cyprus), two unelected prime ministers (in Greece and Italy),widespread protests, lengthening jobless totals and an ongoing recession.

You can track it all in our interactive timeline:

12.41pm GMT

Here’s video footage of the scenes outside Cypriot banks today:

12.39pm GMT

Cyprus’s president thanks people for showing calm

The president of Cyprus has thanked the Cypriot people for the “maturity and collectedness” shown today as the country’s banks reopened.

12.32pm GMT

Channel 4′s Faisal Islam spies 10 private jets at the runway at Larnaca Airport, in Cyprus, up from just one ten days ago before wealthy depositors learned that they would be taxed under the Cypriot bailout plan.

12.18pm GMT

Eurozone deposits fastest to leave Cyprus in February

Further evidence that bank accounts started emptying before the Cypriot bailout…

From Reuters:

Savers from other euro zone countries withdrew 18% of the cash they held in Cyprus in February, amid fears the struggling island would impose a tax on bank deposits.

Figures from the Central Bank of Cyprus published on Thursday show deposits from other euro zone states fell €860m to €3.9bn making them the fastest category to leave the stricken country.

I mentioned earlier that total deposits in Cyprus’s outsized banking sector fell by over 2% in February. So it appears that foreign savers, not ordinary Cypriots, were the primary cause.

This eurozone data obviously excludes any movement of deposits to Russia.

11.45am GMT

Latest photos from Cyprus:

This photo shows a Laiki Bank manager tries to calm depositors waiting for the opening of the bank’s branch in Nicosia.

And here’s a man leaving a Bank of Cyprus branch in the Cypriot capital, Nicosia.

11.36am GMT

One of our readers in Nicosia has very kindly provided this report of the situation an hour ago at a local branch:

There was a queue of about 12 outside the large Bank of Cyprus Branch on Strovolos Avenue. in Nicosia.

I do not know how many were inside, but the banking hall would accommodate 30 or more. All was calm and orderly. No police or security staff visible.

We have used internet banking to transfer a very few hundred Euro from a BoC Instant Access account to a BoC current account. The transaction was accepted, but is marked as awaiting confirmation.

He also points out that Cyprus will not be marking Good Friday with a bank holiday — the Greek Orthodox Easter is some weeks away.

Monday is a bank holiday – for Cyprus Independence Day.

11.04am GMT

Natalie Powell of @featurestory reports that many Cypriots say they have no intention of pulling all their savings out of the bank. In fact, they plan to leave it there to support Cyprus.

She reports:

A lot of people are saying to me that they are not intending on taking all of their savings out of the bank, or even trying to….

The country needs money, and they will keep that money in the banks and support them.

You can listen to her latest audio clip from Cyprus here.

Updated at 11.05am GMT

10.49am GMT

Good news. The three branches which didn’t manage to open in time for 10am GMT (see 10.26am) are now all dealing with customers.

It’s a good effort by staff after the 12 day bank holiday; many don’t know how much longer they’ll have a job.

10.36am GMT

Helena Smith: Pragmatism and preaching at the Bank of Cyprus

Four people at a time being allowed in at the Bank of Cyprus branch on Evrou Avenue.

Helena Smith is there, and reports a sense of pragmatism, not panic:

“I want to cash my salary,” says Christina Andreou wielding a cheque for €1300.

“There’s no point being anything but patient. Fighting is going to get us nowhere,” says Dinos Volides who turned up at bank with a cane. “Everyone in the bank is trying to be as helpful as possible.”

The only commotion, so far, has come from a woman visitor from Catford who is giving rousing speech outside the bank invoking the crowd to remember “the suffering of the Lord on Good Friday.

Ask for his forgiveness, acknowledge that you have gone astray,” she says.

Updated at 10.42am GMT

10.26am GMT

Some branches don’t open on time

It’s clear now that several branches failed to hit the noon deadline to open their doors:

10.22am GMT

At some branches, customers are being allowed in one at a time to ensure order.

Everyone was also handed a copy of the capital control decree agreed overnight – so they are aware what they can, and cannot, do

10.12am GMT

This branch wasn’t quite ready to open, though:

10.11am GMT

No panic here

People began entering one Bank of Cyprus branch in Nicosia in an orderly fashion, under the watching gaze of Sky News.

There was a security guard on hand to prevent a crush inside, but no suggestion of panic.

One gentleman, Mr Lucas (80), explained:

They have stolen our money… which we have been working for 60 years.

How are we going to live?

Updated at 10.27am GMT

10.01am GMT

And the banks are open, with one lady taking the time to put a reporter in their place:

Updated at 10.09am GMT

9.59am GMT

Speaking of Laiki, Tanya Talaga of the Toronto Star flags up that customers are encouraged not to abuse its bank staff today:

Many Laiki staff are likely to lose their jobs when its toxic assets and large deposits are placed in a ‘bad bank’ and run down, with its small deposits heading to Bank of Cyprus.

The queuing customers don’t look likely to riot, though. Many are elderly people, who don’t own ATM cards.

9.55am GMT

The entire board of Laiki Bank (Cyprus Popular Bank) have submitted their resignations, according to a filing to the Athens stock market (Reuters reports). Laiki, of course, is being wound-down under the bailout agreement.

9.48am GMT

Cyprus: still calm as banks get ready…..

9.44am GMT

Cyprus bank deposits fell before bailout – ECB

Now this is interesting. Private sector deposits in Cyprus fell by 2.2% in February, to €46.4bn, according to data released by the European Central Bank.

The drop in savings levels, which matches a fall in January, came as deposits in Greece rose by 2.2%, to €171bn.

Such monthly figures are volatile, but they do suggest that some Cypriot depositors were canny enough to shift their savings abroad before the bailout was agreed (on 16 March).

Martin van Vliet of ING commented:

A further sharp decline in Cypriot bank deposits in March looks all but guaranteed.

More importantly, however, next month’s figures will shed more light on how (large) depositors in other peripheral countries have reacted to the uninsured-depositors-will-be-hit Cyprus bailout deal.

9.33am GMT

Hats off to the Telegraph’s Nick Squires for interviewing the Cypriot with the parrot on his head (see 9.00am) outside a bank branch.

The man is 87, the parrot is 67. One of them is called Costas; it is not clear which as his English is negligible.

More here.

9.22am GMT

Helena Smith: The shock in Nicosia

The scene on the ground in Nicosia is quiet but, as our correspondent Helena Smith reports, people are also struggling to cope with the trauma of recent days.

Helena writes:

On the streets of Nicosia it is busy as usual. At the best of times the Cypriot capital is a sleepy place, languorous and laid back.On the face of it today is no different – shops are open, clinics are accepting patients, people are sweeping the front steps of their homes and apartment blocks.

When I ask a Greek Cypriot Orthodox priest in a stovepipe hat whether today is a big day, he responds with a simple shrug and smiles. But there is no denying that this is a populace in deep shock with many repeatedly likening what has happened to them with the sudden death of a loved one.

“We’re feeling the same sort of emptiness,” said Afrodite Elisaou, a doctor whose husband works in Laiki and still has no idea whether he will have a job tomorrow.

“It’s the shock of it happening overnight, of going to sleep thinking you have a job and waking up not having one. Had all this happened to us gradually, and not in a day, it would have been much better.”

9.13am GMT

Photos: Cyprus banks get ready

A couple of photos from inside a Laiki Bank branch.

Laiki is being wound-up under the bailout deal agreed last week, but its customers (with under €100k) will be transferred to Bank of Cyprus.

9.00am GMT

If the bank re-opening goes smoothly, expect to see a lot of this gentleman and his pet parrot:

8.47am GMT

EC backs capital controls, for now…

The European Commission has supported Cyprus’s decision to impose capital controls, but urged the country to lift them as soon as possible.

In a statement this morning, the EC said it had made a ‘preliminary assessment’ that the measures restricting the movement of capital are legal:

In current circumstances, the stability of financial markets and the banking system in Cyprus constitutes a matter of overriding public interest and public policy justifying the imposition of temporary restrictions on capital movements.

The EC added that it will continue monitor the need to “extend the validity of or revise the measures”, to make sure they are proportionate to the need to maintain financial stability in Cyprus.

While the imposed restrictive measures appear to be necessary in the current circumstances, the free movement of capital should be reinstated as soon as possible in the interests of the Cypriot economy and the European Union’s single market as a whole.

Here’s the statement: Statement by the European Commission on the capital controls imposed by the Republic of Cyprus

8.31am GMT

Capital controls decree

As Hoth25 wittily pointed out in the comments threadt below, Cyprus bank customers can only withdraw €300 from their account per day. So you can’t simply show up, empty your account and transfer it to your mattress.

That restriction was confirmed under the capital controls announced late last night. You can see the final decree on capital controls here:

It’s broadly as expected:

cashing cheques is banned,

people can only carry €1,000 each when they leave the country

Savings accounts cannot be accessed early (except to pay a loan)

transferring funds abroad is heavily restricted: (businesses must seek approval for payments over certain levels, people abroad can only withdraw €5,000 per month on their cards, payments to students overseas are capped at €5k+ tuition fees per quarter).

And the decree “shall apply for a seven day period starting from the day of its publication in the Official Gazette of the Republic”.

Updated at 12.09pm GMT

7.57am GMT

Another sign of early calm – journalists outnumbering customers at this bank:

Matina also confirms that there’s “no hysteria”, but security guards are stationed outside branches.

7.55am GMT

Early calm in Cyprus ahead of bank reopening

The situation in Cyprus appears pretty quiet so far.

Instead of a bank run, there are reporters racing around the branches — and the good news is that they haven’t found any signs of trouble.

Cash is being delivered by security teams to branches, that are currently expected to open in 2 hours time.

7.39am GMT

Cyprus stock market drops plans to reopen

Breaking news: the Cyprus stock market has just announced that it will not reopen his morning.

That’s a surprise — the bourse had been scheduled to begin trading after its own suspension.

More as we get it….

Updated at 7.40am GMT

7.32am GMT

Cyprus banks prepare to reopen

Good morning, and welcome to our rolling coverage of the crisis in Cyprus.

What happens if you close a country’s banks for almost two weeks, restrict cash withdrawals, agree swingeing controls on taking money out of country, and then reopen the branches again?

Panic? Anger? Or calm?

We’ll find out this morning, as Cyprus’s banks open their doors for the first time since the country signed up for its ill-fated bailout package 12 days ago.

It’s a remarkable situation — last night, trucks (apparently) carrying containers of euros arrived in Nicosia amid tight security. Hundreds of staff from the private security firm G4S are also guarding branches and shipping money around Cyprus to ensure branches have sufficient funds to cope.

The banks are due to reopen at noon Cyprus time, and run until 6pm, so 10am-4pm GMT.

Last night Cyprus finally agreed the details of tough capital controls to limit money flooding out of the country. Limiting people to taking out just €300 per day is meant to prevent a bank run.

So perhaps all will be calm. We’ll see….

Updated at 8.03am GMT © Guardian News & Media Limited 2010

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