In the last three weeks, the fiscal calamities in Greece, Portugal, Ireland, and other nations have been overshadowed by a much smaller, yet potentially more disastrous nation’s fiscal problems: the financial sector of Cyprus.
Compromising some 70% of Cyprus’s economy, the financial sector of the island country has, to put it simply, overextended itself to the point of collapse. Like in America, the sector then used government force to escape the effects of their errors. Unlike in America, they didn’t settle for bailouts from taxpayer dollars – they seized customer’s assets to pay for their mistakes.
For two weeks, everyday citizens were unable to access their checking accounts. ATM’s quickly ran out of cash and, soon afterward, cash-only signs appeared for basic necessities.
Now, two weeks later, banks are reopening with financial controls that would make the Soviet Union blush.
Strict controls, contained in a Finance Ministry decree, limit cash withdrawals to no more than 300 euros per day, ban the cashing of cheques and bar businesses from transferring money abroad unless they can show it is for imports.
The island’s central bank will review all commercial transactions over 5,000 euros and scrutinize transactions over 200,000 euros on an individual basis. People leaving Cyprus can take only 3,000 euros with them.
You couldn’t make a better recipe for financial sector collapse if you tried. People instantly rushed to the bank to save what they could of their own accounts from the new EU decree. The government then closed all banks in order to secure the assets they just sold to the EU for bailout funds. This drove Cyprus financial stocks sharply downwards, prompting the government to suspend trading.
Despite the fact that overextended credit caused this crisis, restrictions on issuing credit is not part of the deal for banks:
Yiangos Demetriou, head of internal audit at the Central Bank, said on state television that the controls would allow unlimited use of credit cards within Cyprus, but set a limit of 5,000 euros per month abroad. He said the measures would last four days but could be reviewed.
The Cyprus government insists these controls are temporary, but plans to keep the stock exchange closed until at least today. However, with the decision to open the exchange changing by the hour, it’s uncertain when markets will open.
Historical precedence for temporary controls is not promising:
Iceland’s capital controls, for instance, were “temporary” when first introduced in 2008. They are still in place, “temporarily”, five years later.
When Britain left the Exchange Rate Mechanism in 1992 it was described by the Chancellor as a “temporary” measure.
Indeed, as far as many were concerned, when in 1971 Richard Nixon closed the gold window – a momentous moment that brought the Bretton Woods system to an end and landed us in a world of floating exchange rates – it was branded a “temporary suspension” as well.
Citizens of Cyprus are rightfully worried. Now that banks have opened, customers are still only able to access a fraction of their money. From Sky News:
“They have stolen our money,” Milton Loucas told Sky News.
“I have been working for 60 years. I am 80 years old. I cannot work again for my living – they have cut the lot.
“Our money, our social insurance – they have cut them. How are we going to live?”
Another Cypriot, Stelios, came out of the bank empty handed.
“I tried to get my February wages and they gave me a piece of paper only,” he said.
“I have two children in the army and they asked for money – I don’t have money to give them.
“The Government didn’t pay anybody. My old parents didn’t get their pension.”
Banks have been the bedrock of our financial security for centuries. Cyprus and the European Union managed to destroy that faith in two weeks.