20 Mar 2013

Cyprus: Leaving Larnaca searching for Eurozone’s FDR

It felt good at the time. Euphoric protests erupted into song outside Nicosia’s parliament as MP’s said “Oxi”, No to the troika. Not a single “Yes” vote.

Little Cyprus, one five-hundredth of the Eurozone economy, had faced down the mighty Troika. I spoke to opposition Leader Andreaus Kypranou of the AKEL party as he triumphantly strode through the crowd.

The Troika had gone too far, he told me, and they should learn a lesson.

As I left Larnaca Airport in the early hours of this morning I noticed the empty “currency declaration” and “cash controls” counter.

Yet there were flights:

  • one by the RAF of bundles of euros for British squaddies,
  • one by Eurosystem banks to fill the cash machines,
  • one by Russians meeting their lawyers about their bank accounts,
  • and one, the flight of capital that everyone expects when, or indeed if, the banks reopen anytime soon.

My flight took off past the private jet parking lot of 13 planes, which I am variously told is “very close to normal” and “totally abnormal for March” by different Cypriots.

By the time I return to Cyprus, it is certainly a possibility that this island will have capital controls. I mentioned the possibility at the end of my TV report last night (see video above).

The Wall Street Journal ran a scoop late last night about collaborative efforts to make contingencies for capital controls in Cyprus. If that is the case, expect officers at that currency declaration counter to be physically searching people trying to leave Cyprus with more than a maximum defined stash of euros.

The Cypriot Navy might be a little busy too.

Of course, in essence Cyprus already has temporary capital controls with the announcement of impromptu bank holidays.

It’s worth getting across just how extraordinary this development was already. The last time it happened across a banking system over multiple days in Europe, was the collapse of Austrian bank Credit Anstalt in July 1933.

Latvia in 2008 is the only event in Europe that gets close, but that was principally one bank. Other than that it’s Latin America, and the bank run-ridden Jimmy Stewart era of the US in the 1930s.

Jacques Cailloux of Nomura has amassed this table with the help of the IMF’s systemic crisis database and academic economic history.

He quotes Roosevelt’s fireside chat of exactly 80 years ago:

“It needs no prophet to tell you that when the people find that they can get their money — that they can get it when they want it for all legitimate purposes — the phantom of fear will soon be laid”.

Sadly Wolfgang Schaeuble, Angela Merkel, and in particular the farming economics specialist who claims to be running the Eurozone – Dutch Finance Minister Jeroen Dijsselbloem – are more PR than FDR.

Perhaps it’s Draghi. He’s disappeared since Saturday.

Here’s the thing. In 1933, Roosevelt stopped the runs after the bank holiday by essentially creating deposit insurance. In 2013, the incompetents and inadequates liberally sprayed across the Troika, have created a pent-up demand for a bank run by stopping deposit insurance.

US Bankers put out this statement on Cyprus on Monday. “Depositors in US banks are insured up to $250,000 and no insured depositor has ever lost money in a bank failure. … Simply put, US insured depositors are safe and their deposits are protected by a strong FDIC fund, a financially secure banking system and the full faith and credit of the U.S. Government”. Can you imagine the Eurozone version of this?

I have been told that so self-satisfied was one north European AAA creditor nation’s delegates at the moment Cyprus caved in to singeing its own depositors in the early hours of Saturday morning, that they high-fived each other. “Gimme Five? Billion of Deposits?”

Budget coming. Let me present the counterargument to this rampant Troikaphobia later.

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