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Lessons from the capital controls in Cyprus

21 June 2015 / 19:06:23  GRReporter
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No matter how much both politicians and economists believe that capital controls on banks could easily be avoided in case of a positive outcome of the negotiations between Greece and its creditors, the capital controls scenario continues to haunt the minds of depositors.

The first thing that should be put across to the public is that the imposition of capital controls does not in itself imply an exit from the eurozone or cuts in deposits. What however is certain is that it will cause a great deal of challenges for households and businesses, and will affect negatively, at least while still in force, the real economy.

Let's see what happened in Cyprus in the spring of 2013 when the decision was made to control the capital in the banking system:

First, the law allowed the Cypriot to withdraw a maximum of €300 per day (including from credit or debit cards) from all banks in the country together. But because it was difficult to enforce, quite a few Cypriots could get €300 a day from each bank they had an account with.

Second, Cypriots traveling overseas could take up to €2000 in cash, while abroad they could withdraw up to €300 per day from ATMs.

Third, sending (after some checks) Cypriot students overseas limited amounts for accommodation, meals, tuition fees, etc. was allowed.

Fourth, for their imports or to take money outside the country, companies had to obtain a currency export permit from the Central Bank of Cyprus, based on preliminary submissions of reams of documents. Due to the cumbersome process, these permits were often too slow to issue.

Fifth, Cypriots were not allowed to open fresh accounts in banks where they had not been customers in the past.

Sixth, documents were required for transactions within the country if they implied transfers from one bank account to another inside Cyprus. For example, those who wanted to buy a car had to first sign a contract with the dealer, then lodge this contract with the bank before being allowed to transfer the sum from theirs to the seller’s account.

Seventh, currency export for investment purposes was prohibited.

Eighth, cheques were only accepted for deposits in the name of the holder, as a result of which they could not be used as a funding tool in trade and transactions.

Ninth, time deposits, which came due on the following month, were extended for at least another month, and then only a part of them could be transferred to a current account.

The key factor – trust

A prominent banking expert from Cyprus told that "if capital controls are imposed in Greece, they will probably have different implications to those in Cyprus. A positive factor with Cypriot banks (with one exception) was that they enjoyed sufficient liquidity and hence could outlive the initial run on them. Besides, a relatively small portion of the deposits was withdrawn during the capital controls period, hence banks were able to weather the storm. Therefore if, God forbid, capital controls are imposed in Greece, the overall climate and the attitude of citizens are the crucial factors. The good thing for us was that Cypriots took to the whole situation with remarkable even-headedness. They put their trust in Cypriot banks and helped the government, and as a result the capital flight was insignificant and the entire system could quickly rebalance. Today, people's confidence in Cypriot banks is fully restored, with capital controls having been relaxed significantly, and then removed."

Tags: capital control Cyprus Greece the real economy
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