Yesterday we brought you some commentary from various economists and pundits who were arguing that in a sense, Cyprus has just left the Eurozone.
The reasoning with this: In order to reopen Cypriot banks (tentatively scheduled for Thursday) Cyprus will need to impose strict capital controls to prevent a bank run. In other words, there will be limits on how much money you can take out, move to another bank, etc.
What this means is that a euro in a Cypriot bank just isn’t worth what a euro in a German bank is, since the latter has far more mobility. There are now multiple euros.
In a note, Morgan Stanley’s Daniele Antonucci makes the same point:
On the probability of eurozone exit: In turn, this has implications for the probability of a eurozone exit. It looks like the eurozone policymakers are keen to keep Cyprus in the eurozone, even though, as a result of these capital controls, Cyprus is effectively no longer a full member of the eurozone. In other words, while it formally stays within the currency union, a euro in a bank deposit in Cyprus is not the same as a euro in another member country. Only once all capital controls are lifted again will Cyprus’ full euro membership be restored. Just to make a parallel, in the case of Greece at the worst of the crisis after the first, inconclusive political election last year, we roughly estimated the probability of a eurozone exit at around 30%.
As we said yesterday, the question of how and when Cyprus opens its banks, and then what kind of withdrawals and capital controls we see (and for how long) is the next big story here.
This story obviously has implications for Cyprus, but also the rest of the Eurozone. Cyprus has set some disturbing precedents already, and those could be exacerbated if leaders can’t get a grip on next stages.
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