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| Cyprus Q&A: what capital controls mean in practice | Cyprus Q&A: what capital controls mean in practice |
| (8 days later) | |
| What are the capital controls being introduced in Cyprus? | What are the capital controls being introduced in Cyprus? |
| • All savings accounts must run until their expiry date – no early withdrawals allowed. | • All savings accounts must run until their expiry date – no early withdrawals allowed. |
| • No cheques will be cashed, although cheque deposits will be allowed. | • No cheques will be cashed, although cheque deposits will be allowed. |
| • Payments out of the country are suspended. Individuals will only be allowed to take €3,000 (£2,500) in cash on each trip out of the country. | • Payments out of the country are suspended. Individuals will only be allowed to take €3,000 (£2,500) in cash on each trip out of the country. |
| • Unlimited use of credit cards is allowed within Cyprus, but there's a spending limit of €5,000 a month abroad. | • Unlimited use of credit cards is allowed within Cyprus, but there's a spending limit of €5,000 a month abroad. |
| • Import payments will be allowed when 'the relevant documents' are provided to the authorities and Cypriots can only transfer up to €10,000 a quarter for fellow citizens who are studying abroad. | • Import payments will be allowed when 'the relevant documents' are provided to the authorities and Cypriots can only transfer up to €10,000 a quarter for fellow citizens who are studying abroad. |
| • The measures will apply to all accounts, regardless of the currency used. | • The measures will apply to all accounts, regardless of the currency used. |
| Why are controls necessary? | Why are controls necessary? |
| Without restrictions on the movement of money the Cypriot authorities believe the frightening scale of capital flight would destroy its banks. Deposit accounts are loaded with foreign money, which in the case of some banks will be taxed at 40%. British and Russian residents are among the most vulnerable and will be looking to squirrel their money out of the country where possible. | Without restrictions on the movement of money the Cypriot authorities believe the frightening scale of capital flight would destroy its banks. Deposit accounts are loaded with foreign money, which in the case of some banks will be taxed at 40%. British and Russian residents are among the most vulnerable and will be looking to squirrel their money out of the country where possible. |
| Could such tough measures be adopted in other eurozone countries? | Could such tough measures be adopted in other eurozone countries? |
| There is concern in Spain and Italy that should they need bailout funds Brussels will demand a Cyprus-style upfront payment from bank depositors. There are reports of banks in both countries suffering a flight of funds to safer havens in the eurozone. But the situations are very different. Italy's banks had a clean bill of health from the IMF this week. Spain's banks remain in difficulties, but bondholders that have lent banks money will suffer ahead of depositors. | There is concern in Spain and Italy that should they need bailout funds Brussels will demand a Cyprus-style upfront payment from bank depositors. There are reports of banks in both countries suffering a flight of funds to safer havens in the eurozone. But the situations are very different. Italy's banks had a clean bill of health from the IMF this week. Spain's banks remain in difficulties, but bondholders that have lent banks money will suffer ahead of depositors. |
| Will tourists face spending limits? | Will tourists face spending limits? |
| Cyprus desperately needs tourists (though German visitors may get a hard time following Berlin's refusal to ease the Mediterranean island's bailout terms). To help tourists and citizens short of cash, the authorities are looking to increase the daily ATM withdrawal limit from €100 to €300. | Cyprus desperately needs tourists (though German visitors may get a hard time following Berlin's refusal to ease the Mediterranean island's bailout terms). To help tourists and citizens short of cash, the authorities are looking to increase the daily ATM withdrawal limit from €100 to €300. |
| Are businesses affected? | Are businesses affected? |
| Large firms must get clearance to pay their workers and must apply for a licence from the central bank to import goods and services. If they have cash in Bank of Cyprus they will lose 40% of their funds over €100,000, while deposits in Laiki Bank will be taxed at 80%. Deposits of more than €100,000 at both banks would be frozen. How the purchase of overseas services will be policed – to prevent phantom transactions siphoning money out of the country – is not known. | Large firms must get clearance to pay their workers and must apply for a licence from the central bank to import goods and services. If they have cash in Bank of Cyprus they will lose 40% of their funds over €100,000, while deposits in Laiki Bank will be taxed at 80%. Deposits of more than €100,000 at both banks would be frozen. How the purchase of overseas services will be policed – to prevent phantom transactions siphoning money out of the country – is not known. |
| How long will capital controls be in place? | How long will capital controls be in place? |
| The government says they will run for four days. It sounds overly optimistic. There appears to be little reason bank or government finances will be in good enough shape to survive an avalanche of money escaping to other jurisdictions. | The government says they will run for four days. It sounds overly optimistic. There appears to be little reason bank or government finances will be in good enough shape to survive an avalanche of money escaping to other jurisdictions. |
| Has it happened before? | Has it happened before? |
| Iceland is the nearest example. After 2008 it imposed strict controls on the movement of money out of the country. In some ways it was in a worse situation than Cyprus. Its banking sector amounted to 10 times GDP compared with eight times in Cyprus (and five times in the UK). | Iceland is the nearest example. After 2008 it imposed strict controls on the movement of money out of the country. In some ways it was in a worse situation than Cyprus. Its banking sector amounted to 10 times GDP compared with eight times in Cyprus (and five times in the UK). |
| The same controls are still in place five years later. Last year the government passed a bill tightening them. Businesses are furious because few foreign firms will invest in the country. If they make any profit they cannot get their money out. Also, foreign workers are discouraged for the same reason should they decide to go back home and Icelanders who want to work abroad must get clearance from the government. | The same controls are still in place five years later. Last year the government passed a bill tightening them. Businesses are furious because few foreign firms will invest in the country. If they make any profit they cannot get their money out. Also, foreign workers are discouraged for the same reason should they decide to go back home and Icelanders who want to work abroad must get clearance from the government. |
| Is Iceland in a better state now? | Is Iceland in a better state now? |
| In many ways yes. The reconstruction of the banking sector, now just twice the size of GDP, has created more well-capitalised and profitable lenders. The cleanup of the financial services sector has allowed the creation of new banks from the ashes of the old. The economy is growing and resolving other debts related to the banking crash. However, much of the gains followed a depreciation of the currency, which is not something Cyprus can follow while it remains inside the euro. | In many ways yes. The reconstruction of the banking sector, now just twice the size of GDP, has created more well-capitalised and profitable lenders. The cleanup of the financial services sector has allowed the creation of new banks from the ashes of the old. The economy is growing and resolving other debts related to the banking crash. However, much of the gains followed a depreciation of the currency, which is not something Cyprus can follow while it remains inside the euro. |
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