Wednesday, March 27, 2013

Waiting game on how Cyprus will stop flight of cash when banks re-open


By Business editor Peter Ryan – analysis

The big question for Cypriots - and foreigners holding bank accounts in Cyprus - is what happens when the nation's big two banks finally open.

But the Central Bank of Cyprus is yet to announce a plan to stop money being pulled out of the country.

So far, the central bank's governor has only said capital controls will be "loose" and "temporary" with no word on what form they'll take or how long they'll last

But the early options are not good ones for ordinary Cypriots who need to put food on the table or businesses needing to pay suppliers or be paid themselves.

Some of the options being canvassed include:

* a weekly limit on how much cash can be withdrawn from banks of ATMs

* a temporary ban on the use of cheques

* powers to prevent the use of credit or debit cards to stop money from being switched out of the country

* limits on access to fixed term bank deposits that have matured or are about to mature

* tougher restrictions on the amount of hard cash that can be taken out of the country

Extreme capital controls are rare but there are precedents.

After the collapse of Lehman Brothers in 2008, Iceland imposed capital controls to protect its currency.

Malaysia did the same during the Asian financial crisis on the late 1990s to ringfence its economy.

But as a Eurozone member, Cyprus is meant to be part of the EU model - the free movement of money, people and trade.

The proposed restrictions highlight the looming crisis Cyprus poses to the Eurozone and the imperative to do whatever it takes to stop depositors from draining bank vaults.

In other developments:

* the European Central Bank moved to quash suggestions that the bailout deal for Cyprus was not a model for future rescues in the Eurozone.

* sharemarkets in Italy and Spain fell after unconfirmed rumours that depositors were shifting their money to financial havens

* Russia's main share index fell to the lowest level in more than three months as Cyprus's bailout plan cast doubt on the safety of $60 billion of loans and deposits in the island nation.

* and the British government has told 18,000 expatriate retirees living in Cyprus to consider diverting pension payments into different accounts to avoid any losses - or perhaps have their pensions paid into the account of a trusted friend.

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