Corralito Redux?

by Andrew Stuttaford


Cypriot MPs have voted to immediately implement capital controls in order to prevent a run on the country’s banks. The bill limits how much customers can withdraw from their bank accounts and restricts access to and transfer of funds. Cyprus the first euro country ever to implement capital controls.

I wonder what bank depositors in Greece, Italy and elsewhere in the euro zone periphery think about that. A special case? Maybe.

Writing in the Daily Telegraph ahead of the Cypriot vote, here’s Jeremy Warner:

However, the perhaps more widely significant part of the proposal is the planned application of capital controls. This is of course entirely necessary to prevent a further run on the banks the moment they open their doors on Monday. Many Russian depositors are threatening to remove their spoils if they are subjected to any kind of a haircut. This would quickly render these organisations essentially insolvent regardless of the recapitalisations. Almost no amount of capital is sufficient for a bank which has lost the confidence of its depositors.

Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into a national currency, rather than part of wider monetary union. The capital controls will severely limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider eurozone. It would be a bit like telling Scots they can’t spend their UK pounds in England. Monetary union is many things, but above all it is about free movement of money and a uniform value wherever it is spent. When these functions are disabled, then you cease to be part of a single currency.

I know what Warner means, but that seems premature. At this stage, better to see such a move as a time-out, no more.

For now, at least.