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One Euro or Two?
There is a debate among market observers over whether the capital controls in Cyprus mean that there are, in effect, two euros now. It is argued by some investment banks and some economists that the capital controls create a Cypriot euro that is different from the euro elsewhere in the monetary union.
While we understand the argument, we continue to demur. We do not think it has to be a theoretical debate. There are indeed some international transactions taking place. For example, companies are allowed to make payments for imported goods, provided documentation is provided to authorities.
Thus far, and we acknowledge that the situation can change, we see no sign that payment of imports is being adjusted for the so-called Cypriot euro. That is to say, despite the polemics, there is not sign at this juncture that the Cyprus euro is being treated differently than euro in the other EMU countries.
We note reports that suggest there was some capital outflows from Cyprus over the past ten days, just not out banks. There were numerous exemptions granted to businesses, and for the imports of medicine, for example. Those euros were also inseparable from other euros in the system.
One group of analysts writing for a one large bank simply assert that the capital controls "create a situation in which a Cypriot euro is not equal to a euro of any other member country from an economic perspective." They then go on to recognize our point: that "the euro bank notes in Cyprus are still worth the same amount as in other countries."
They still want to conclude though that there are two euros. In a market for euro deposits, they say, a euro in a Cypriot bank account "would now most likely not be trading at par with those of other member states." Since such a market, of course does not exist now, this claim can not be tested. It remains a theoretical point.
It is possible that the longer the capital controls are in place, the more likely some divergence will take place, as investors get more anxious and are willing to sell their claims for less in order to get access to their money quicker. The government currently suggests the controls will be reviewed after seven days. We suspect that a week from now, that capital controls on some banks may be lifted, though the logistic and administrative challenges at both Bank of Cyprus and Laiki Bank (Cyprus Popular Bank) may mean that those capital controls can persist longer.
By introducing some monthly and quarterly limits, for students studying abroad, for example, or cash transfers for people traveling out of the country, clearly lends itself to the idea that all capital controls will not be lifted in a week's time, or even two weeks.
Nevertheless, our point remains valid that the question of one or two euros is not a theoretical question but a practical one. And as of now there is only one euro.
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This Marc to Market fellow has always struck me as more of an apologist for the status quo than I might expect on ZH.
So Marc, Mr. Currency Specialist: when one has a fixed exchange rate regime where the official exchange rate is supported by capital controls, what might we expect would happen if the controls were removed? Answer: a devaluation of the official rate to meet the no-doubt black market rate. In other words, capital controls were necessary to preserve a disequilibrium exchange rate. The capital controls artificially elevate the demand to hold the currency.
Another way to present it: what would you rather have - 1000 euros in a German bank account or 1000 euros in Cyprus bank account? Would you pay 1000 euros for the former but less than 1000 euros for the latter? For your clients' sake, I hope that the answer is yes.
Yet another way: is there perfect convertibility between German euros and Cypriot euros?
'Nuff said.
If you are a Cypriot depositor and you can only withdraw 300 Euro per day are not your Euros different from others?
Captial controls on Cypriot Euros of course means there are two different Euros; those in Cyprus and those outside of Cyprus.
Cypriot Euros are being held captive, other Euros are not.
Cypriots cannot use credit cards, non-Cypriots can.
To demure in the face of theft is to aid the thief.
Look Marc the fact that such a market doesn't exist in fact proves that the currency is split.
If I have time deposits (CDs) in an Alabama bank and I live in NJ I can get a bid for those deposits in ten minutes and liquidate them. Not so with Cypriot Euro (CY€).
The CY€ is like Gilligan. Stuck on the island. I can't bid for any CY assets of any kind, in fact, because it's not clear I can ever get paid. The new currency isn't just "not the €", it's unconvertable.
At least this is how the situation seems to me. What am I missing?
There are very definelitely two kinds of money: bank credit money and paper currency. When the banking system looses depositor's confidence and there are capital controls, a premium will emerge between bank accounts and actual spendable paper money. This is the first step to hyperinflation. Reports of helecopters full of cash arriving in Cyprus (which is funny) may be true. Bank money is inaccessible, and confiscated, an therefore worth less than the wallet stuff. Everything will move to paper trasnactions. When that fails because there is too much paper money, you move to true hyperfinaltion.
It's a practical issue alright, and the Cypriot citizens that cannot access their capital or get it out of their disintegrating country don't really care if you want to word tango over whether their currency is being treated unequally because they already know it is. They feel it as capital controls pound them in the face. From afar you have the luxury of pretending otherwise, they do not.
As a thought exercise, do you think JG Wentworth would charge a steeper premium for loans against instruments in Cyprus banks than they would in German banks?
There's a reason why they haven't said what the capital controls will be, it's because it will be extremely bad.
From the Cyprus historical record of only a few weeks ago:
« 11 February 2013
Mr Doros Ioannides
President, Cyprus Bar Association
Dear Mr Ioannides,
Following the publication of an article in the Financial Times dated 10 February 2013 and titled "Radical rescue proposed for Cyprus", the Central Bank of Cyprus wishes to stress that any action aimed at reducing, depriving or restricting the property rights of depositors, contradicts the provisions of the Constitution of the Republic of Cyprus and of Article 1 of the First Protocol of the European Convention of Human Rights, provisions which protect the right to own property and which are crucial to the functioning of a free market economy.
Hence, any suggestion to the contrary is not only legally unfounded but it cannot merit serious consideration.
Yours sincerely,
Dr George M. Georgiou
Head of Governor's Office and Communications
Central Bank of Cyprus »
Dear George,
You vill accept what we give you and like it, or the first item on the agenda will be elliminating the Head Governor's office. Kapeesh?
Yours sincerely,
Mr. Doros Ioannides
If there are two, I will take the better one please. Thank you.