When Is A Euro Not A Euro

Tyler Durden's picture

With the 'temporary' capital controls being imposed in Cyprus, Credit Suisse explains why a Cypriot euro not equal to a euro from any other member country. Furthermore, the clear fabrication of a 'seven-day' period for these controls (when monthly and quarterly limits on spending are also included) is questioned as they ask how such capital controls could eventually be lifted with no obvious cure of the underlying problem, i.e., the risk of a bank run. Since every guarantee is only worth as much as its guarantor, we would expect that in absence of a European wide deposit guarantee (which for political reasons and the aforementioned template look very unlikely) these capital controls are likely to stay for longer than originally planned. Unless this vicious circle is broken, this attempt to save the euro could ironically even become the template of how a member state could leave the currency union.

Via Credit Suisse,

A euro is not a euro

 

...Capital controls are being imposed as part of the [Cyrpus] deal. While this is legal according to the Treaty on the Functioning of the European Union (TFEU Art. 63, 65 and 66), it creates a situation in which a Cypriot euro is not equal to a euro of any other member country from an economic perspective. In fact, while euro bank notes in Cyprus are still worth the same amount as in other countries, in a market for euro deposits, a euro in a Cypriot bank account would now most likely not be trading at par with those of other member states.

 

Moreover, at the moment markets are being told that these capital controls are only temporary. But we are wondering how such capital controls could eventually be lifted with no obvious cure of the underlying problem, i.e., the risk of a bank run. With the aforementioned template in place and the necessity of a second bailout looking likely as a result of the economic shock currently rippling through the country, depositors are strongly incentivised to take out their money as soon as capital controls were to be lifted. In fact, this might already be in evidence, as we hear that large Russian deposits have been moved out of the country via foreign subsidiaries of Cypriots banks, who did not seem to have been restricted by the same capital controls as domestic banks. This is likely to increase the pain for the local Cypriot population, even more so now that the local bank holiday has been extended for two more days.

 

Since every guarantee is only worth as much as its guarantor, we would expect that in absence of a European wide deposit guarantee (which for political reasons and the aforementioned template look very unlikely) these capital controls are likely to stay for longer than originally planned.

 

Unless this vicious circle is broken, this attempt to save the euro could ironically even become the template of how a member state could leave the currency union.

 

...


Drifting apart

There is another development that eventually could become a serious threat to the long-term existence of the euro. Its roots lie in the fact that the euro has always meant different things to different people. It would be too simple to reduce this to one dimension, but the role of the ECB and how it balances its priorities of price stability versus financial stability is just one example.

So while in good times the euro seemed to have managed to be all things to all people, now in economic distress, the difference in believe of what is needed to keep the currency alive are becoming a lot more visible. As a result, inner European resentment is increasing, with the core being blamed for too little help under too strict conditions and the periphery sometimes perceived to be too reluctant to change.

This is dangerous, since without the general acceptance of the strings attached to the common currency, the risk is that the euro loses its appeal to both sides.