WSJ: Cyprus Capital Controls Could Create ‘Confidence Crisis’ in Europe

Thursday, 28 Mar 2013 12:07 PM

By Dan Weil

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The capital controls Cyprus has imposed on foreign transactions could lead to broader problems in Europe, according to a Wall Street Journal editorial.

Cyprus is “the first eurozone country to impose capital controls since the single currency was introduced,” The Journal editors write. “This will spare Cyprus from immediate economic collapse, but the curbs are a worrying precedent.”

Limits on domestic financial transactions are justifiable as emergency measures, according to the editorial.

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“More troubling is [the country’s] control on cross-border capital flows.” Limits are being placed on money that can leave the country.

“Like the curbs on internal transactions, trapping money within Cyprus will help avert an immediate freeze-up of the domestic economy,” the editorial states.

“But the trouble comes once money is allowed to move freely again. At that point, even insured depositors will reconsider whether they wouldn't rather keep their savings somewhere else.”

So there is an incentive to keep the capital controls, which are only scheduled to be in place for a week, in force for an extended period.

The rest of Europe is in play too, The Journal editors say. “Capital controls in Cyprus could reinforce a broader confidence crisis if they convince depositors elsewhere in Europe that they too might someday face strictures on capital movement,” they write.

Other commentators too see a good chance that Cyprus will maintain capital controls for a while.

“This is a typical set of exchange control measures, more reminiscent of Latin America or Africa,” Bob Lyddon, managing director of international banking association IBOS, tells The New York Times.

“There is no way these will only last seven days. These are permanent controls until the economy recovers.”

Mujtaba Rahman, a senior analyst at the Eurasia Group, says Cyprus is in a Catch-22.

“If you don’t impose the controls, the money is going to fly. But when you remove those controls, clearly the money is going to leave anyway,” Rahman tells The Times

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