Thursday, March 28, 2013

No Bank Run Yet

The capital controls are in place, and while there were lines, there were no runs when Cyprus opened its banks today.

Do note that it is 2013, and most people do their banking over the internet … so the real thing to look at is not 20th century style lines, but the data on internet withdrawals that will come out over the next several weeks.

How long will the capital controls be in place? No one knows. They Cypriot government says a week to a month. This does not seem historically informed: Iceland is now in year 5 of its controls, and the UK maintained wartime capital control from 1939 to 1979 (that’s not a typo). Note that both of those places had profitable industries other than financial services. Cyprus is left with serving daiquiris by the pool.

I didn't know this:

Still, the experience of other capital-controlled countries gives us some lessons about how these regimes work out over time. Capital controls turn into trade controls, as the locals attempt to find ways to turn hard assets or non-banking services into foreign exchange. At some price, for example, you can buy a boat in Cyprus with post-haircut, capital-controlled local deposits, sail it to Lebanon, and then sell it for real, usable money. The same with antiques, jewellery, or anything else you can think of. Even capital goods such as fork lifts can be motored off in the middle of the night.

Of course the authorities anticipate some of these problems, but there are always new ones. Particularly after the initial shock of control imposition wears off, the population turns from productive effort to finding ways to game the system. Some cultures are more resistant than others to this change in character, but in all cases social cohesion and respect for law are eroded over time.

There are winners, of course. As one of my sovereign restructuring friends says: “The financial institution that comes out ahead is the Banco de Mattress. After all, if you are a small depositor, you can’t turn up with your €25,000 in cash in Frankfurt and expect to be able to open a bank account. You can, though, just keep it at home or in your own safe.”

Fixers and intermediaries become sought after; having a cousin in the central bank will be a mark of social distinction.

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