Cypriots trapped by draconian capital controls

Ben Southwood
Follow Ben
  • Cypriots banned from taking large sums abroad
  • Draconian restrictions in place as banks reopen today
  • Concerns that controls will become permanent

CYPRUS will today become the first Eurozone country to introduce draconian limits on how much money can be moved out of the country, as politicians battle to avoid a devastating bank run when branches reopen after 12 straight days of closures.

As part of the strict capital controls, Cypriots will be banned from cashing cheques, and limits will be set on how much cash can be withdrawn each day and on foreign payments made on Cypriot credit cards.

The measures, outlined in an official government decree, restrict credit and debit card use abroad to €5,000 (£3,305) per month, while Cypriots travelling abroad can take a maximum of €1,000 worth of bank notes with them. ATM withdrawals will be capped at €300 per day.

The central bank will scrutinise all commercial transactions between €5,000 and €200,000, with larger transfers assessed case-by-case, and there will be a ban on redeeming time deposits before maturity.

Though officials reassured citizens that the restrictions would be temporary, critics were quick to point out that Iceland’s capital controls – rushed into action in November 2008 as a short-term fix – are still in place today.

Fears that the controls are likely to be extended were fuelled by the rule that Cypriots studying abroad will be allowed to move €5,000 per quarter.

Cypriot banks are set to reopen at 12 noon local time today, staying open for just six hours after almost two weeks of shuttered doors. The European Central Bank sent banks trucks full of cash to service the expected demand.

A member of the central bank’s audit team went on national television to tell Cypriots that the controls would not limit credit card use within Cyprus, and that although initial measures would last just four days there is scope for them to be reviewed.

European stock markets sagged as details of the controls were leaked, dragged lower by a weaker than expected Italian bond auction. The Euro Stoxx 50 fell 1.09 per cent, while the French CAC 40 slipped 0.99 per cent, the Italian FTSE MIB dropped 0.92 per cent and Spain’s IBEX 35 dived 1.13 per cent. The German DAX closed 1.15 per cent down on the day.

The Euro fell 0.69 per cent against the dollar to $1.278 – its lowest level in four months. Five-year yields on Italian bonds jumped the most in a month after the country’s disappointing auction, also rising across Spain, Portugal and Greece as investors shunned the Eurozone’s risky peripheral markets.

Portuguese and Maltese officials rushed to deny that Cyprus could be a template for other Eurozone countries.

“The Cyprus case is unique,” said Portugal’s cabinet secretary Luis Marques Guedes. “There is no risk whatsoever that this solution may be generalised.”

Meanwhile Russian firms and banks said they were considering legal action over the losses that they will be left with when Cyprus imposes haircuts of up to 40 per cent on bank deposits above the guarantee limit of €100,000.

Russian depositors make up the bulk of non-EU foreign depositors in Cyprus, with deposits of up to €19bn.

Officials have warned that the €2.5bn Russia loaned to Cyprus in 2011 could be affected by the controls.

The controls come after a torrid 10 days on the island, during which the EU, IMF and European Central Bank finally reached agreement on a €10bn aid package for Cyprus – winding down its second largest bank and hitting uninsured savers.