Capital Controls in Cyprus, Bank Lines Not as Long as Expected

Banks opened today in Cyprus. There were lines but not as long as some anticipated. The S&P 500 established a new record, 1569.19, breaking the old one set in October of 2007. I'd say it's time to start selling.

The capital controls in Cyprus include the following: funds cannot be electronically transferred to another country; a maximum of 3,000 euros in cash can be taken out of the country; allowable ATM withdrawals have been increased to 300 euros a day from 100 euros; credit and debit card charges are limited to 5,000 euros a person a month; banks will accept payroll checks as deposits but will not cash them. This info can all be found in Liz Alderman's story, "Cyprus Sets Up Tight Controls as Banks Prepare to Reopen," from this morning.

Imagine the same restrictions in the United States. There would be an armed insurrection.

The EU is coming under fire. As Alderman says,

Under European Union treaties, restricting the free movement of capital is forbidden. Critics say that what is happening in Cyprus shows that union rules will be flouted when the International Monetary Fund, the European Central Bank and European Union leaders find it convenient to do so.

By imposing capital controls, European and Cypriot officials have effectively created two classes of euro: cash that can be freely spent, and cash that is locked up by capital controls, effectively diminishing its value.

“It has to be acknowledged that this is something entirely new,” said Nicolas Véron, a senior fellow at Bruegel, a research group in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington. “This will shape expectations in other countries, and the issue is whether capital controls can be avoided in future episodes.”

Borrowing rates for Italy and Spain increased yesterday.