Blog Post

Capital controls on Cyprus seem to have been avoided (or not?)

As my colleague Zsolt Darvas has pointed out, the eurogroup agreement of last night looks pretty good given the circumstances. A number of very important decisions have been taken that need emphasizing.

By: Date: March 25, 2013 Topic: European Macroeconomics & Governance

As my colleague Zsolt Darvas has pointed out, the eurogroup agreement of last night looks pretty good given the circumstances. A number of very important decisions have been taken that need emphasizing.

First, it has been made clear that depositors can make losses but not with an indiscriminate tax. That is good news as distinguishes between the system and the institution. Second, the ECB has confirmed that it is ready to provide liquidity to the Bank of Cyprus. This is crucial so as to allow the Bank to continue operating. Solvability of BoC will be established by a deposit equity conversion, which is again the right way of bailing in depositors. At the same time, the insolvent Laiki bank will be shut down. Third, insured depositors will be protected.

What is the most critical question ahead, which the Eurogroup statement did not fully cover? It is about when and how the banks will be opened again. This relates to the question of capital controls, to which I pointed on Saturday. I cite from the eurogroup statement.

“The Eurogroup takes note of the authorities’ decision to introduce administrative measures, appropriate in view of the present unique and exceptional situation of Cyprus’ financial sector and to allow for a swift reopening of the banks. The Eurogroup stresses that these administrative measures will be temporary,  proportionate and non-discriminatory, and subject to strict monitoring in terms of scope and duration in line with the Treaty.

First of all, it is imperative to re-open banks. If all banks are closed in Cyprus, the country does not have a functioning payment system. The eurogroup acknowledges that a swift re-opening of the banks is necessary.

Second, given the close connections between banks, it is necessary to have enough time for the proper re-structuring of Laiki and the re-organisation of BoC. It may therefore be advisable to keep banks closed for a couple of more days.

Third, once the viable banks open up again, many depositors will want to change their deposit structure, inter alia by moving deposits abroad or to different banks. There should be no rules that prevent this from happening. The Eurogroup therefore indeed stresses that the “administrative measures” should be non-discriminatory. If properly applied, this means that Cyprus indeed does not introduce capital controls as deposit transfers among banks will not be hindered depending on their location. Thereby, Cyprus has avoided introducing capital controls.

Fourth, it is important to clarify what the administrative measures contemplated are. Details and semantics matter in this context. There is obviously a need for some administrative measures to prevent a technical collapse of the payment system. For example, the system may be equipped to handle say  1 million payment requests per hour and may fall apart when there are 10 million of such payment requests. For that, an administrative measure to slow down the incoming of payment requests may be warranted. Such a plan would be fully justified. If administrative measure, however, consist of allowing small payments to take place and large payments not to take place, it would be discriminatory and close to capital controls again.

Fifth, it is important, that the eurosystem stands fully ready to replace outflowing deposits with unlimited ECB liquidity. The Eurogroup has now taken a decision on which bank it considers solvent. The ECB needs to provide liquidity to the banks considered solvent and has agreed to do so. In addition, the remaining banks that are not mentioned in the Eurogroup statement should as usually continue to receive ECB liquidity against collateral.

Sixth, some commentators have pointed me to Article 65(1, b), which could allow for capital controls. I am not a lawyer but I would like to make the following observations. Article 63(1) reads: “Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.”  This should be the guiding principle for all capital movements in the euro area and prevent capital controls. Article 65(1b) is quite unclear and actually says that “to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.” This may potentially allow for some administrative measures but discriminatory capital controls would certainly be covered by the clause.

Overall, a good deal has been reached given the bad circumstances of end of last week. It is now crucial to provide a credible timeline for the opening of banks. Moreover, the Cypriot authorities should clarify asap what “administrative measures” are exactly contemplated. Those measures should not limit capital flows across Cypriot borders as otherwise they would be capital controls. Capital controls would ultimately mean that a euro anywhere is not a euro everywhere anymore.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More by this author

Blog Post

Bank regulation in the European Union neighbourhood: limits of the ‘Brussels effect’

The EU model of financial market regulation is increasingly copied by third countries. In this context, the EU’s efforts to promote its model beyond its borders should take into account the underdevelopment of financial markets in many partner countries, and the often insufficient capacity of regulators and supervisors.

By: Alexander Lehmann Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 20, 2019
Read article Download PDF More by this author

Policy Contribution

Crisis management for euro-area banks in central Europe

Euro-area bank integration has decreased as post-financial crisis national rules require banks to hold more capital at home. It might be undermined further by bank resolution planning. Either a Single Resolution Board takes the lead for the entire banking group or independent local intervention schemes need to be developed for crisis resolution.

By: Alexander Lehmann Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 19, 2019
Read about event More on this topic

Past Event

Past Event

Better governance, better economies

This event will feature the presentation of the 2019 EBRD Transition report, which focuses on governance in the EBRD regions.

Speakers: Daniel Daianu, Beata Javorcik, Zsuzsanna Lonti and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Press Club Brussels Europe, Rue Froissart 95, 1000 Brussels Date: November 19, 2019
Read about event More on this topic

Past Event

Past Event

Improving regulatory policy formulation and institutional resilience in Europe

Are large differences in the resilience of individual economies related to differences in the quality of country-level institutions that shape the absorption and response to these shocks? At this event we'll discuss the evolution of labour markets, and the role of institutional design and good process.

Speakers: Arup Banerji, Maria Demertzis, J. Scott Marcus, Céline Kauffmann and Rogier van den Brink Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 13, 2019
Read article More on this topic More by this author

Opinion

Scholz's improved plan to complete the banking union

The head of German Finance has written in the Financial Times defending the need to deepen the banking union, now London is about to leave

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: November 8, 2019
Read article Download PDF More on this topic

External Publication

A Primer on Developing European Public Goods: A report to Ministers Bruno Le Maire and Olaf Scholz

This report was prepared for the French and German Ministers of Finance.

By: Jean Pisani-Ferry and Clemens Fuest Topic: European Macroeconomics & Governance Date: November 8, 2019
Read article Download PDF

Policy Contribution

How to make the European Green Deal work

Ursula von der Leyen has proposed a European Green Deal that would make Europe climate neutral by 2050. With this Policy Contribution, the authors provide a first analysis on how to make this initiative work.

By: Grégory Claeys, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance Date: November 5, 2019
Read article More on this topic

Opinion

Politics, not policy will help Lagarde save the eurozone

Her success at helm of Europe’s central bank will depend on her ability to mend fences with hawkish policymakers.

By: Guntram B. Wolff and Rebecca Christie Topic: European Macroeconomics & Governance Date: November 4, 2019
Read about event

Past Event

Past Event

What industrial policy for the European Green Deal?

This event will be a workshop, aiming to look into the design and implementation process of the European Green Deal. Each session will be introduced by three short presentations aimed at launching the discussion among all workshop participants.

Speakers: Jos Delbeke, Bertrand Déprez, Markus Hess, Laura Piovesan, Megan Richards, Simone Tagliapietra, Mary Veronica Tovšak Pleterski, Kurt Vandenberghe and Reinhilde Veugelers Topic: Energy & Climate, European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 4, 2019
Read article More by this author

Podcast

Podcast

How to Spend it

Can governments make their fiscal policy go further? And are they trusted enough to try? This week The Sound of Economics asks if the quality of public spending is as important as the quantity.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: October 23, 2019
Read article More on this topic

Blog Post

Talking about Europe: La Stampa 1940s-2010s

An on-going research project at Bruegel seeks to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. In this third blogpost, we carry out the exercise on 9.9 million articles from an Italian daily newspaper, La Stampa. The trend increase in the frequency of European related articles, previously found looking at the French and German press, is confirmed in the case of Italy.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: October 22, 2019
Read article More on this topic More by this author

Podcast

Podcast

The Art of the Brexit Deal

An emergency Brexit podcast to dissect today's tentative deal between the EU27 and the British Government, featuring Maria Demertzis, Guntram Wolff and Nicholas Barrett

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 17, 2019
Load more posts