The Cyprus crisis sees the eurozone as “ongoing work”
The day after Cyprus reopened its Banks, depositors continued to face restrictions on access to capital. ATM withdrawals are limited to 300 euros per day, and the amount of overseas travel available to departing passengers is limited.
These controls are designed to prevent worried depositors from losing money and moving money abroad. But the so-called “capital controls” are controversial, as is the new strategy used by the eu to tackle the banking crisis.
The final Cypriot deal provided bank customers with an account protection of up to 100,000 euros. However, this has caused a huge loss of 40 per cent for many large depositors. Jacob Kirkegaard of the peterson institute for international economics says this is bad news for big depositors, but it is a positive precedent for eurozone taxpayers.
“They are no longer in trouble for bailing out bank shareholders and bank bondholders and failing Banks,” he said.
This is what happened in the early days of the European banking crisis. In countries like Ireland, the government and ultimately taxpayers bear the loss of the country’s failed Banks. If the Cyprus deal becomes a template for the future, as some eu officials have suggested, that means investors and big depositors should beware.
“The uninsured depositors or companies usually now have to pay more attention to the health of the Banks they put in, but I think welcome to capitalism,” Kirkegaard said.
He acknowledges that there is a short-term downside: weaker Banks will struggle to attract investors and depositors, further undermining them.
Or ordinary currency?
While Kirkegaard thinks the overall outcome in Cyprus is promising, harvard economist Ken Rogoff is not sure. He said eu officials were doing things they had never done before. First, they are inflicting pain on the large depositors.
Jens Nordvig, head of global currency strategy at nomura, said: “what people think is impossible has actually happened.” He said the Cyprus agreement questioned whether the euro was really a common currency.
“Clearly, for those who have savings Banks in the euro area – if you have to worry about whether you really can take out your money, you are in Cyprus and other countries of the euro is the same as Germany and France’s euro, which may cause a certain degree of uncertainty, this may be unsettling,” he said.
An imperfect alliance.
Despite the potential uncertainty, world financial markets reacted coolly to the Cyprus incident. But, says Nordvig, eu Banks are paying more to support investors and depositors because of the crisis. These higher costs will be passed on to private and commercial borrowers.
This is unfortunate, because one of the things that can alleviate this is the eu’s economic growth. But given the government’s austerity policies and the credibility and confidence of the banking crisis, it is hard to see how growth can gain traction.
‘it is clear that the euro project remains a’ ongoing work, ‘said Harvard University economist Kenneth rogoff.
“I still think there will eventually be a core eurozone, but there may be some divergence, and some peripheral countries have some sort of primary relationship with the possible capital controls,” he said.
These capital controls, like Cyprus, will be designed to protect the economy. Rogoff says it may take a long time for them to become full members of the euro zone again.