Cyprus Capital-Controls Q&A

Following the deal between Cyprus and its international creditors on a bailout, there are just as many questions as answers, particularly surrounding the imposition of capital controls. Here our reporters address some of the most pressing issues:

By Matina Stevis and Joe Parkinson

Q: What actions does Cyprus need to take to enforce the capital controls adopted with last week’s legislation?

A: The Cypriot parliament passed enabling legislation last week, giving the central-bank governor and the finance minister the power to take measures to stem capital outflows. The legislation is quite generic and allows the country’s top finance and monetary officials to impose measures ranging from daily ATM withdrawals to freezing domestic interbank lending, suspending direct-debit orders and converting checking accounts into time deposits. The law allows the finance minister or, when relevant, the central-bank governor, to “take whichever restrictive measure [they] consider necessary under the circumstances, for reasons of public order and/or public security.” A decree enacting this bill and laying out the specific details of the capital controls is yet to be issued.

Q: What capital controls are already being enforced (e.g. border checks, ATM limits)

A: Customs officials said border guards at the counrtry’s air and sea ports have been instructed to check baggage and monitor whether travelers are taking more than €10,000 (about $13,000) out of the country. Any amount above that €10,000 threshold can be confiscated. Daily ATM limits vary: at Popular Bank of Cyprus (Laiki), cash-machine withdrawals have been capped at €100 euros; at Bank of Cyprus, the limit is €120. Other ATMs are operating normally.

Q: Can people bypass controls and ATM withdrawal limits by crossing over to Northern Cyprus?

A: At present, border guards at the main pedestrian crossing point on Ledra Street aren’t searching people unless they have intelligence indicating that someone is carrying a large amount of cash. That could change.

Q: How are the ATM limits and bank closures affecting businesses, such as hotels?

A: Many businesses are struggling to understand how the capital-control measures will affect their day-to-day operations, such as their access to cash, meeting payroll and other obligations, as well as the longer-term impact of the financial crisis on their businesses. “In two-three days we need to pay our employees. Will we be able to do that? What happens with the workers who get paid via Laiki?” asks Michalis Pilikos, the president OEB, Cyprus’s national business association. “For many this will be a major wound, we’ll see immediate mass layoffs and closures.” In the meantime, many small businesses are refusing to accept credit-card transactions of electronic transfers out of uncertainty over when banks will reopen and concern they may not be able to recoup the funds. Some larger businesses, like Nicosia’s Hilton Hotel, still accept credit cards but not bank transfers.

Q: When are banks likely to reopen? What will happen when banks reopen? Will even small depositors have access to their deposits?

A: On Monday, March 25, banks were officially closed for a national holiday in commemoration of Greece’s Independence Day. They have been closed since March 16. The Cyprus Central Bank said that all banks, including Bank of Cyprus and Cyprus Popular Bank, will reopen on Thursday at 8:00 a.m. Officials are expected to have the capital-control measures in place before then.

http://blogs.wsj.com/eurocrisis/2013/03/25/cyprus-bailout-qa/

Related:   Cyprus crisis: What are capital controls and why does it need them?

Cyprus risks euro exit after EU bailout ultimatum

By Michele Kambas

NICOSIA | Thu Mar 21, 2013 11:02pm GMT

(Reuters) - The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown.

Parliament will reconvene later on Friday to debate a raft of government crisis measures after lawmakers adjourned a late-Thursday sitting saying they needed more time for consultation.

Even those measures looked likely to fall short of a promised "Plan B" to raise the 5.8 billion euros (4.92 billion pounds) demanded by the EU in return for a 10 billion euro lifeline from the EU and IMF.

The European Central Bank said it would cut off liquidity to Cypriot banks without a deal, and a senior EU official told Reuters the bloc was ready to see the island banished from the euro to contain damage to the wider European economy.

Angry Cypriot lawmakers on Tuesday threw out a tax on deposits, calling the EU-backed proposal "bank robbery".

After more talks on Thursday, the currency union's finance ministers urged Cyprus to table a new proposal.

Trying to placate its lenders, the government proposed to parliament a "solidarity fund" that would bundle state assets, including future gas revenues, as the basis for an emergency bond issue, likened by JP Morgan to "a national fire sale".

It also sought the power to impose capital controls on banks, a type of measure unseen since before the country joined the single currency bloc five years ago.

ECB PATIENCE FLAGS

The European Central Bank, which has kept Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off.

"Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks," the ECB said.

In Brussels, a senior European Union official told Reuters that an ECB withdrawal would mean Cyprus's biggest banks being wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro.

"If the financial sector collapses, then they simply have to face a very significant devaluation, and faced with that situation, they would have no other way but to start having their own currency," the EU official said.

Cypriot banks, crippled by their exposure to Greece, the centre of the euro zone debt crisis, have been closed all week and are not due to reopen until Tuesday.

Long queues formed on Thursday at ATMs still dispensing cash, and there were angry scenes outside parliament where several hundred protesters, many of them bank employees, rallied after rumours the second-largest lender, Cyprus Popular Bank, was to be wound up.

Chanting "Hands off the bank", several demonstrators jostled with riot police.

"We have children studying abroad, and next month we need to send them money," protester Stalou Christodoulido said through tears. "We'll lose what money we had and saved for so many years if the bank goes down."

The central bank said it was readying measures to keep Popular Bank afloat. Some banking officials said it could be split between good and bad assets.

LIMITED OPTIONS

Under the levy rejected by parliament, EU lenders, notably Germany, had wanted uninsured bank depositors to bear some of the cost of recapitalising the banks, but Cyprus feared for its future reputation as an offshore banking haven and planned to spread the burden also to small savers whose deposits under 100,000 were covered by state insurance. Lawmakers threw it out.

In Moscow since Tuesday, Cypriot Finance Minister Michael Sarris said he was discussing possibleRussian investments in banks and energy resources, as well as an extension of an existing 2.5-billion-euro Russian loan.

He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on Monday that Nicosia sought an extra 5-billion-euro loan.

The chairman of the euro group of finance ministers, Dutchman Joreon Dijsselbloem, told the European Parliament in Brussels that Moscow informed the EU it had no intention of ploughing more money into Cyprus.

Senior euro zone officials acknowledged in a confidential conference call on Wednesday that they were "in a mess" and discussed imposing capital controls to insulate the currency area from a possible collapse of the small Cypriot economy.

Cyprus itself refused to take part in the call, minutes of which were seen by Reuters. Several participants described its absence as troubling and reflecting the wider confusion surrounding the island's predicament.

(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Karolina Tagaris and Costas Pitas in Nicosia, Georgina Prodhan in Vienna, Lidia Kelly and Darya Korsunskaya in Moscow and Paul Carrel in Frankfurt; Writing by Matt Robinson; Editing by Will Waterman)

http://uk.reuters.com/article/2013/03/21/uk-eurozone-cyprus-idUKBRE92F07R20130321?feedType=nl&feedName=uktopnewsmid

Cyprus' Unprecedented Bailout: More Common Than You Think

By Morgan Housel 

March 18, 2013 

The tiny nation of Cyprus was bailed out by its eurozone partners and the IMF this weekend. That much is barely news. The bailout of a country with a broken banking system is now known as a slow Sunday.

But there was something different about Cyprus' bailout that sent shivers through the global banking system. Deposit holders in Cyprus banks are being forced to pay for part of the deal. The original deal, which looks like it's now being revised as I write this, says those with 100,000 euros or more in Cyprus banks will have 9.9% of their deposits levied -- or taxed, or confiscated, or whatever you want to call it. Those with less than 100,000 euros will take a 6.75% haircut.

This is rare, if not unprecedented, in modern bank bailouts. Deposit holders have long been considered sacrosanct. In the U.S., we have the FDIC. A bank's shareholders can lose everything when it screws up. Bondholders can take a hit, too. But deposit holders, particularly small mom-and-pops, are typically untouchable. "The FDIC has a long history of stability and safety," says former chairwoman Sheila Bair. "No one has ever lost a penny of insured deposits." Europe can't say the same. 

But there's another side to this story.

If Cyprus had its own currency, it would be dealing with its economic problems by printing money. That would eventually cause inflation. How much? I don't know, let's say 6.75%. In that case, those with cash deposits in Cypriot banks would lose 6.75% of their money in real terms -- the same amount being directly confiscated on most deposits through the IMF bailout. 

Think of it that way, and Cyprus's bailout fee is only unprecedented in a semantic way. When a government directly takes 6.75% of deposits, people freak out. When the government takes money indirectly through 6.75% inflation, few are concerned.

There are two takeaways from this.

The obvious one is that Cypriots are getting a raw deal only if you consider the bailout fee in isolation. Compared with what would have likely occurred without a bailout, it isn't bad at all. Most estimates I've seen of what would happen if Cyprus were forced to leave the euro and return to its old currency predict a devaluation of 40% to 60%. The country was in a terrible position with no easy solutions. It took the least bad option.

The other takeaway is that when it comes to cash, the difference between inflation and a direct levy is minimal. Most don't think of inflation as a fee because they don't see money being directly removed from their bank accounts. But the effect on wealth is the same in the end. Sheila Bair is right that no one has ever directly lost a penny on FDIC-insured deposits. But an untold amount of deposit wealth has been lost to inflation.

I'm neither a conspiracy theorist nor a goldbug, and this is not an anti-Fed rant. There will always be inflation, and dealing with it is more useful than grumbling about it. There are plenty of options to invest money at rates of return above inflation. Charlie Munger once said: "I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I've seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not."

The problem is that so many investors have willingly made themselves subject to inflation's mercy, plowing into cash and bonds that yield less than inflation. They are subjecting themselves to their own mini-Cyprus bailout fee year after year.

What's unfortunate is that they may not even know it. Cypriots are well aware of their fee. They see the headlines. They'll see the withdrawals. Money here today will be gone tomorrow. Other people around the world who invest in the comfort of FDIC-insured cash and bonds yielding nothing, I'm afraid, are much less aware.

http://www.fool.com/investing/general/2013/03/18/cyprus-unprecedented-bailout-more-common-than-you.aspx