With Cyprus unable to convince anyone to bail it out the banks will remain closed until at least next week. And when they reopen they may be subject to capital controls.
“The purpose of this law is, in case of an emergency for purposes of public order or security, to assign powers to the (Finance) Minister, or the (Central Bank) governor to take and impose temporary restrictive measures, including restrictions on capital controls,” said the bill, a copy of which was seen by Reuters.
Nobody knows exactly what this may involve. But Max Keiser notes that the restrictions could include, but not necessarily be limited to the following:
Restrictions in daily withdrawals
Ban on premature termination of time savings deposits
Compulsory renewal of all time savings deposits upon maturity
Conversion of current accounts to time deposits
Ban or restrictions on non cash transactions
Restrictions on use of debit, credit or prepaid debit cards
Ban or restriction on cashing in checks
Restrictions on domestic interbank transfers or transfers within the same bank
Restrictions on the interactions/transactions of the public with credit institutions
Restrictions on movements of capital, payments, transfers
Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety
The de facto capital controls began when the banks closed their doors. After all, the ultimate form of capital control is a cobwebbed “gone fishing” sign in front of the bank; closing their portals is like pulling the plug on the financial system as the Cypriots knew it. Fox reporter Shemaine Bushnell, who is married to a Cypriot, describes what life is like when plastic no longer works.
NICOSIA, Cyprus – And so it begins…what I had been passively worrying about the last week has now hit me hard.
I went to the pharmacy today to buy some milk and medicine for my 3-year-old and the pharmacist informed me that they were no longer taking credit or debit cards. It’s cash only, because that’s what their suppliers are demanding. The same is true at several gas stations on the island, and I don’t doubt that more will soon follow …
What once was the top shopping hub for the entire island has now become a ghost town … Coffee shop talk used to be about the latest trend in fashion, gossip about friends and political opinions. Now it’s more about which ATM is still dispensing cash, and when will the banks reopen, or even if business will still be taking credit cards after tomorrow …
Once the financial system shuts down everything else progressively turns itself off. Bushnell continues: “if banks stay closed, bills will not be paid, Internet and cell phone service will be interrupted, and even electricity and water could be shut off. I do not believe it will come to such a desperate situation, but I have made my own preparations, as I’m sure other Cypriots have done.”
With plastic gone, the whole system of virtual tokens on which an economy functions defaults back down to paper and instances it drops right down to barter. The Australian Broadcasting Corporation’s Cyprus correspondent writes that unless the system is restarted, the sheer need to physically survive will compel Cyprus to abandon the Euro and print its own devalued currency.
A senior EU official told the Reuters newsagency in Brussels that if Cypriot banks are wound up, Cyprus will be forced to abandon the euro.
“If the financial sector collapses, then they simply have to face a very significant devaluation and, faced with that situation, they would have no other way but to start having their own currency,” the EU official said …
In the meantime, Cypriots have turned to cash for everyday transactions, with facilities such as electronic payments out of action. “It’s already become quite clear that Cyprus has moved into a cash only economy,” said London School of Economics southern Europe specialist James Ker-Lindsay.
“You know, petrol stations are no longer taking credit cards, I think a lot of supermarkets and, meanwhile, you’ve got all sorts of businesses which obviously can’t conduct transactions anymore because they can’t use electronic banking, they can’t get money out of the island, they can’t get money in.”
Some banks are limiting the amount of cash depositors can withdraw from ATMs each day and Dr Lindsay says its clear most of the tiny nation’s financial institutions will collapse if a bailout is not forthcoming by the end of the weekend.
A world without financial services is Hobbesian. The Wall Street Journal describes the life of one gas station operator. “To keep his business running, Mr. Yianni had to pay €22,000 ($28,000) up front—about a third of it in cash—to secure a delivery of gasoline on Wednesday. Now he needs to bring in enough cash so he can restock.” And that means cash. No exceptions, no room for pity. Not even for old ladies or cute children. It’s cash — or barter.
When an elderly woman entered Mr. Papayiannis’s office to ask if he would accept a Laiki Bank check for €170 to buy some groceries and get some cash back, he answered quickly.
“It’s not even conceivable,” Mr. Papayiannis told the woman, who left without making a purchase.
Restaurant and kiosk owner Sakis Siakopoulos said he has resorted to barter in order to meet his obligations. A supplier of meats from Greece, he said, agreed to accept a shipment of Cypriot Halloumi cheese instead of a bank transfer.
Dylan Matthews at the Washington Post has charted out all the possible exits from this hell. He covers all the bases: a) Negotiate another European bailout, complete with haircut; b) implement a more traditional European bailout; c) bail out the banks themselves; d) accept a Russian bailout; e) convert deposits to CDs; f) leave the Euro and …. wait for it … f) hope for an American bailout.
Yeah, right, I know, but Ben Bernanke can technically decide that the latest round of asset buys the Fed is conducting should be switched from mortgage-backed securities to Cypriot bonds. If he buys those at bargain basement rates, Cyprus could finance the bailout without bankrupting itself. Same goes for any other central bank, like the Chinese or Indian banks. Brazil could get involved, maybe Britain or Canada. Who knows, it could be a whole party. Whether any of these countries think it’s worth the political risk of bailing out a tiny island in the Mediterranean which none of their constituents care about is another story. That’s why discussion focuses around Europe’s central bank rather than any institutions outside the European Union.
Cyprus might be bust but for the sake of the greater good old Ben Bernanke has to ride to the rescue. Because maintaining confidence in the larger global system is something that must be achieved at all costs. Otherwise the music stops and who knows what happens then?
Well we do know what happens then. Cyprus shows us. A European country goes from credit, to plastic, to cash, then barter, and then finally, unless the process is halted, to guns, knives and clubs, teeth and fingernails.
So the music must always play. Once financial rescues are perceived as simply banks bailing out each other with fake printed money the penny will drop. Cyprus demonstrates what happens once confidence evaporates. The system doesn’t just slowly chug to a halt, it implodes. Ka-boom.
One moment the banks on the island were open for business as usual. In the next instant the very same banks, physically the same on unchanged buildings and streets, were regarded as bankrupt. All that changed was information.
I have often written that the world crisis is at heart a crisis of information. The correspondence between physical things and the abstract financial system that values them has fallen out of sync. It cannot remain this way. The financial database is full of lies; and parenthetically, the political system, which is the handmaiden of the financial system, is as full of lies as well. Somehow they have to be brought into near alignment again.
Pretending that space aliens are going to invade, as Paul Krugman suggests, as an excuse to print money, or deciding we can borrow ‘infinite amounts’ as Bloomberg says, ain’t gonna work.
The challenge in the coming years is to unwind this deficit. The challenge is to bring the official narrative into line with the physical facts. If we won’t do it willingly then reality will do it for us. Guaranteed. Whatever the media or political or financial elite say one fact has remained unchanged since the beginning of the world. Nobody ever beat arithmetic.