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Capital controls in Cyprus

The finance ministry announced that the country\’s banks would remain closed until Tuesday as it proposed measures to impose capital controls, limiting the amount of money depositors could remove.


Are they
actually allowed to do this?

I\’m sure they\’re allowed to limit extractions from the banks. But are they allowed to restrict the movement of capital across intra-EU borders? I\’m not entirely sure that they are you know…..it is one of the pillars of the internal market after all.

15 thoughts on “Capital controls in Cyprus”

  1. Offshore Observer

    Tim,

    I think capital controls can be imposed as a temporary emergency measure in times of crisis. Of course in the breakup of a monetary union the first two steps are (1) close the banks and (2) impose capital controls. The next step is to redenominate the currency.

    Fingers Crossed that is thier Plan B

  2. I wonder if anybody has studied the economic effects of shutting down a country’s banks, with no notice, for a week and a half, with no end in sight. This must be starting to do measurable damage to GDP?

    “The single currency benefits business in many ways, in addition to cutting costs and risk. It encourages investments and brings more certainty to business planning – thus allowing businesses to be more effective overall.” (The European Commission).

  3. Alex,

    I’ve just had this email from an old friend from my service days. His wife is Cypriot and he runs a small business in Limassol:

    “Life savings about to disappear, this is one fucked-up place at the moment! Banks shut, cheques to pay in, current account nearly empty, direct debits about to be taken so probably no electric or phone soon. Pension from UK suspended until further notice.
    Went shopping yesterday and got 4 crates of baked beans and 200 toilet rolls, and some Keo, ready to batten down the hatches. Shops & garages no longer accepting cards, cash only, so even the stash under the mattress is diminishing rapidly.”

  4. Article 66 of the Treaty of the functioning of the EU states “Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, on a proposal from the Commission and after consulting the European Central Bank, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary.”
    So yes, they can, for 6 months.
    http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:0047:0200:en:PDF

  5. I’m betting against Cyprus leaving the Euro:

    1. Fear of a run on PIIGs forcing them to consider leaving once precedent has been set

    2. Too many political careers at stake if they have to admit that all the damned fools were right

  6. Tim

    They can. The provisions of the original treaties allow for necessary measures for public policy purposes. (Original art 58? Maastricht) and Art 59 allowed for qualified majority voting on an EU basis. The governments were never going to not build this power in. There are equivalents in the Japanese Foreign Exchange Control Law (the newest version of which basically removed all capital controls). The UK appears to have been clumsy, explaining why they ended up using anti terrorism legislation on Icesave. (HMT are a bit crap)

  7. The EU is stumbling from crisis to crisis with no idea how to deal with any of them. The result is that they seem to have found, by doing nothing, that systems naturally heal themselves. Markets really do work.

  8. Nick,

    Good luck with that line of thinking and getting them to admit it … turkeys voting for Christmas spring to mind.

  9. It proves the simple idea that economics is a matter of choices. You can’t have all good things together.
    Fixed exchange rate – good. Free movement of capital – good. Stable prices and wages – good. But you can’t have all three at once.
    With the euro fixing rates, either prices and wages have to vary downwards (austerity) or capital can’t be free to move. Cyprus is the first example of that.
    Floating exchange rates were a market-based solution to this balancing act. Capital and labour was free to move, and money wages could be broadly steady. Exchange rates shifted slowly.
    It was manageable, but then the politicians thought they could take over everything. Crack-brained idiots.

  10. Simon “I’m betting against Cyprus leaving the Euro”

    The Euro will leave them, because it will leave everyone. It’s an impossible construct, and if it’s impossible then it will end. Just a question of when.

  11. Interested,

    I admire your faith in reality over political careers, its almost touching.

    Anyway, who said anything about Cypriot politicians having a say in this matter; there duty is to do as their told and then go and feed the fish the food, if they are lucky.

  12. Are they allowed to do this?

    Are they allowed to make up the rules as they go along?

    Were they legally correct to allow Greece into the Eurozone in the first place?

    Rhetorical questions all.

    Where “The Project” is concerned, any and all rules will be sacrificed whenever necessary – along with the youth of several large nations, Italian manufacturing industry, the private property of anyone who has any when the chips are down, etc etc.

    “Whatever it takes”, remember? Did you think they were joking?

  13. Ken,

    IIRC from Nigel Lawson’s “The View From No. 11”, the UK Treasury designed surrendered the power to introduce exchange controls by executive order in 1987 and had to get formal agreement for this from the European Commission. that suggests to me that in the IceSave case it was just easier to use anti-terrorism law, than go back to the floor of the House of Commons.

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