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| Cyprus: latest in a long and inglorious line of bank shutdowns | Cyprus: latest in a long and inglorious line of bank shutdowns |
| (8 days later) | |
| As Cyprus faces up to the dismal prospect of bank branches remaining shut until next week, if not longer, the unusual nature of the country's financial crisis has been brought to light as the economy struggles to operate without the lifeblood of retail banking. | As Cyprus faces up to the dismal prospect of bank branches remaining shut until next week, if not longer, the unusual nature of the country's financial crisis has been brought to light as the economy struggles to operate without the lifeblood of retail banking. |
| The banks' doors may be locked in Cyprus, but the lights are still on. Behind the scenes, electronic transactions continue fitfully, under pressure, and cash machines are refilled and continue to dispense banknotes. | The banks' doors may be locked in Cyprus, but the lights are still on. Behind the scenes, electronic transactions continue fitfully, under pressure, and cash machines are refilled and continue to dispense banknotes. |
| While enforced bank closures are a typical response to defend banks from being overwhelmed by panicking depositors withdrawing their cash, what's different in the case of Cyprus is that it's the threat of a deposit guarantee being removed that is causing the panic, rather than fears of a collapsing currency or hyperinflation, as has been the case in most recent national bank runs. | While enforced bank closures are a typical response to defend banks from being overwhelmed by panicking depositors withdrawing their cash, what's different in the case of Cyprus is that it's the threat of a deposit guarantee being removed that is causing the panic, rather than fears of a collapsing currency or hyperinflation, as has been the case in most recent national bank runs. |
| In Argentina, the government's doomed attempt to maintain a fixed exchange rate with the US dollar saw scenes of chaos in 2001 as individuals besieged the banks to exchange pesos for dollars at the prevailing exchange rate, despite the government's fervent declarations – backed by the IMF – that the currency regime would not be abandoned. | In Argentina, the government's doomed attempt to maintain a fixed exchange rate with the US dollar saw scenes of chaos in 2001 as individuals besieged the banks to exchange pesos for dollars at the prevailing exchange rate, despite the government's fervent declarations – backed by the IMF – that the currency regime would not be abandoned. |
| As queues lengthened, riots broke out and the strain on Argentina's foreign exchange reserves intensified, the government tried bank closures before slapping on a 12-month freeze on withdrawals above $250 a week – known as the corralito or "little fence". Even after Argentina's government bowed to the inevitable and allowed the peso to depreciate, the corralito stayed in place until the end of 2002. | As queues lengthened, riots broke out and the strain on Argentina's foreign exchange reserves intensified, the government tried bank closures before slapping on a 12-month freeze on withdrawals above $250 a week – known as the corralito or "little fence". Even after Argentina's government bowed to the inevitable and allowed the peso to depreciate, the corralito stayed in place until the end of 2002. |
| In the meantime, the people of Cyprus are discovering, like those of Argentina, that widespread bank closures and restrictions place strains on unusual parts of an economy. | In the meantime, the people of Cyprus are discovering, like those of Argentina, that widespread bank closures and restrictions place strains on unusual parts of an economy. |
| Argentina suffered such a shortage of banknotes that local governments and some businesses in the country – including McDonald's outlets – decided to use self-issued bonds, coupons and IOUs to make up for the scarce currency. One was the patacón – a bond first issued by the Buenos Aires state government to pay staff salaries, which was adopted as a de facto currency because it could be used to pay taxes. | Argentina suffered such a shortage of banknotes that local governments and some businesses in the country – including McDonald's outlets – decided to use self-issued bonds, coupons and IOUs to make up for the scarce currency. One was the patacón – a bond first issued by the Buenos Aires state government to pay staff salaries, which was adopted as a de facto currency because it could be used to pay taxes. |
| In Cyprus, the prolonged bank closures have been less dramatic – so far at least – but the lack of access to banks and their services has been more than a headache for those trying to complete property transactions or purchases above credit card limits. And at the other end of the financial scale, newspaper sellers and taxi drivers complain at the disappearance of coins: according to the Financial Times, Cypriot taxi drivers are setting fares in five- and ten-euro denominations to avoid having to use them. | In Cyprus, the prolonged bank closures have been less dramatic – so far at least – but the lack of access to banks and their services has been more than a headache for those trying to complete property transactions or purchases above credit card limits. And at the other end of the financial scale, newspaper sellers and taxi drivers complain at the disappearance of coins: according to the Financial Times, Cypriot taxi drivers are setting fares in five- and ten-euro denominations to avoid having to use them. |
| But even in situations where bank runs have been caused by fears of financial instability rather than currency collapse, policymakers have avoided the mistakes made in Cyprus. | But even in situations where bank runs have been caused by fears of financial instability rather than currency collapse, policymakers have avoided the mistakes made in Cyprus. |
| One of Franklin Roosevelt's first acts as US president in March 1933 was to order a week-long "bank holiday" to halt a devastating month-long run on US banks, with scenes – recreated in Frank Capra's It's a Wonderful Life – of smalltown investors demanding their deposits be returned. But Roosevelt combined the bank closures with the passage of new legislation – the Emergency Banking Act – to offer deposit insurance when the banks reopened. | One of Franklin Roosevelt's first acts as US president in March 1933 was to order a week-long "bank holiday" to halt a devastating month-long run on US banks, with scenes – recreated in Frank Capra's It's a Wonderful Life – of smalltown investors demanding their deposits be returned. But Roosevelt combined the bank closures with the passage of new legislation – the Emergency Banking Act – to offer deposit insurance when the banks reopened. |
| In Cyprus, the pressure on the local banks has come in part because of the plans to tax savings accounts, voiding the European Union's previous guarantee on deposits up to €100,000 – the very reverse of FDR's plan, which saved America's banks by reassuring investors that their money was safe. | In Cyprus, the pressure on the local banks has come in part because of the plans to tax savings accounts, voiding the European Union's previous guarantee on deposits up to €100,000 – the very reverse of FDR's plan, which saved America's banks by reassuring investors that their money was safe. |
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