Currency Controls in Cyprus Increase Worry About Euro System

from The New York Times..

By Andrew Higgins

July 9, 2013

NICOSIA, Cyprus — On a visit to Athens this year, Marios Loucaides, a Cypriot businessman, saw an apartment he liked in the heart of the Greek capital and decided to buy it. He told the owner he would seal the deal with a bank transfer — the price was 170,000 euros, about $220,000 — once he got back to Cyprus.

After returning home, however, Mr. Loucaides discovered that the euros he had on deposit here in Nicosia, the capital, could not be moved to Greece, even though the two countries share the same currency and, in theory at least, the same commitment to the free movement of capital.

The apartment deal collapsed. And so, too, did Mr. Loucaides’s belief that Europe has a common currency. Tangled in restrictions imposed in March as part of a bailout for the country’s ailing banks, a euro in Cyprus is no longer the same as one in France, Germany or Greece.

“A Cyprus euro is a second-class euro,” said Mr. Loucaides, the managing director of the Cyprus Trading Corporation.

Capital controls, once a tool used frequently by governments in times of crisis, have become extremely rare in Europe, though they are not unknown. Iceland, which is not a member of the European Union and uses its own currency, imposed them in 2008 after its three main banks imploded.

With a gross domestic product of about $23 billion and shrinking, Cyprus is little more than a rounding error in the $9.5 trillion euro zone economy. But Cyprus is also the first nation using the euro to restrict the flow of capital, raising a crucial question: Has the breakup of the euro zone — something European leaders have been struggling to prevent for three years with frantic summit meetings in Brussels and a series of bailout packages worth hundreds of billions of euros — in fact already started?

President Nicos Anastasiades of Cyprus certainly thinks so. “Actually, we are already out of the euro zone,” he said, citing restrictions on the movement of euros from Cyprus as evidence that his country’s money now has a different status and value from that in France, Germany and the 14 other European Union nations that use the currency.

“It is a peculiar situation,” Mr. Anastasiades said in an interview.

The rules of the European Union, enshrined in the 1992 Maastricht Treaty, ban restrictions on the movement of capital, but the measures by Cyprus have been endorsed by the European Central Bank and the union’s executive arm, the European Commission, as essential to prevent money from fleeing the country. While the European Central Bank declined to comment on the Cyprus situation, officials in Brussels say they remain firmly committed to maintaining the euro as a single currency.

Nevertheless, many financial experts say Cyprus has, in effect, made a “silent, hidden exit” from the euro, said Guntram B. Wolff, the director of Bruegel, a Brussels research group. Despite a softening of restrictions, he added, “the euro in Cyprus is still not the same as a euro in Frankfurt.”

The rigid capital controls introduced in March have been steadily relaxed, but they still snarl businesses and ordinary Cypriots in a web of red tape.

Within certain, and constantly changing, limits, individuals and companies can now make transfers abroad and between banks in Cyprus, operations that were initially prohibited. However, they need to present invoices and other documents to justify moving their money. Transfers over 500,000 euros, about $640,000, by a company — and 300,000 euros, about $380,000, by an individual — require the central bank’s approval.

It is still forbidden to cash checks or to open a new account unless a previous one existed at the same bank. Individuals can withdraw no more than 300 euros a day, while the limit for companies is currently set at 500 euros. Signs at airports warn passengers that it is illegal to carry more than 3,000 euros out of the country.

All these rules and the paperwork they create add to the cost of many transactions, effectively reducing the value of the euro in Cyprus compared with a freely movable euro in the rest of the euro zone.


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