Cyprus Banks Are Roach Motels. Money Goes In. It Doesn’t Come Out.

There will be a $13 billion bailout supplied by the European Union. Europe’s voters will not get to vote on this. The unnamed “Euro Group” of national finance ministers have agreed to the bailout. It answers to no one. The EU parliament has nothing to say about this.

Banks on Cyprus will remain closed. Depositors will not be allowed to withdraw more than $130 a day in currency: the ATM limit. No one says when the banks will reopen. It may be a week. It may be longer. As to how much anyone can withdraw, no one in authority is saying.

Rich depositors will lose if they had over $130,000 in the nation’s #2 bank, which has been shut down by the central bank. The central bank will create a new, improved bank to replace it. Depositors with under $130,000 will have their accounts transferred to this new bank. Bondholders in the busted bank will lose everything.

The crisis is not over. More than one Cyprus bank was in trouble. The central bank has imposed controls. This means that depositors cannot get their money out. The central bankers understand what will happen as soon as the other banks open. There will be a wave of withdrawals. Rich depositors now see the handwriting on the all. If they are wise, they will set up accounts in German banks and then tell their banks in Cyprus to transfer all of their money out of Cyprus. Then the crisis will repeat. The central bank has imposed capital controls to prevent this. But these controls will cripple the economy.

The media report that the big depositors are Russians. Their nationality is irrelevant. The fact is this: they have huge deposits in the other Cyprus banks. They want out of Cyprus now. In all likelihood, so do all rich citizens in Cyprus. Once capital controls are lifted, what will prevent this? Why should rich depositors keep euros in Cyprus banks when they can transfer these deposits to any other European bank outside of Cyprus?

Now there are capital controls. This means that Cyprus is Europe’s Roach Motel. “Money goes in. It doesn’t come out.” Capital controls mean that rich people will stop depositing money in banks in Cyprus. The banking system of Cyprus will not recover. The banking crisis in Cyprus has not ended.

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