10 September 2013 Why a Cyprus euro really is worth a German euro

Why a Cypriot euro really is worth a German euro
(Unless you are very rich)

By Fiona Mullen, Director, Sapienta Economics Ltd
Since capital controls were imposed as a result of the conditions of the Cyprus bailout in March, I have seen a number of articles declaring that a Cypriot euro is not worth the same as a euro elsewhere in the eurozone.
These articles tend to have two things in common: they are written by people who do not live in Cyprus, and fail to mention the fact that restrictions have been gradually lifted since their first imposition in March.
The argument is based on the premise that if capital controls exist, then a Cypriot euro cannot buy the same as a German euro.
But there are a number of reasons why this is not the case in practice.

There is not much that you cannot purchase abroad
Back in the bad old days, we woke up on March 16 to find that we could not take money out of cash machines, we could not make any purchases abroad with plastic cards, and that a number of shops would not take card payments.
At that time, it was certainly true to say that a Cypriot euro was worth less than a German euro.
But the very restrictive is situation lasted only around 48 hours. By Monday or Tuesday (I forget when, it was such a crazy time), I remember pulling EUR 500 out of the cash till and waving it triumphantly at a car driving by.
The banks finally reopened on March 28 and the first capital controls decree was published on March 29. Transfers abroad were limited for both individuals and business to EUR 5,000 per day and payments of between EUR 5,000 and EUR 200,000 needed the approval of a special committee. Payments above EUR 200,000 inside or outside Cyprus were much more cumbersome.
Fast forward to the end of August, and I can now do the following.
As an individual I can use a card to buy goods and services abroad of up to EUR 5,000 with no restrictions at all.
As a company I can buy goods and purchases of EUR 5,001 to EUR 500,000 abroad by visiting the bank with “justifying documents”. I have not had to do this but I understand that an invoice will suffice.
If I need as a company to make a purchase between EUR 500,001 and to EUR 1 million, this is still possible with a bit more paperwork. If the purchase is over 1 million, it takes more paperwork again but is still possible.
If I am lucky enough to be a pre-existing customer of one of the approved international banks, I can buy as much as I like without any restrictions at all, whether I am a company or an individual.
There are special arrangements for companies who pay salaries and those who pay university fees and expenses.
This is vastly different from the situation in Iceland. (For more on this check out Sigrun Davidsdottir “Aspects of capital controls in Iceland and Cyprus and the long-time damaging effect” at www.uti.is.)

Salaries and company turnovers are small
I have not heard any complaints that companies cannot buy what they need abroad specifically as a result of capital controls. Companies do have difficulty in getting letters of credit. But this has more to do with the credit rating of Cyprus than capital controls as such.
This is probably because over 90% of enterprises in Cyprus have fewer than 10 employees according to the last Census of Establishments, so few will have the funds to make purchases beyond even EUR 5,000 per month, let alone EUR 500,000.
Within Cyprus things are also easier. I can transfer up to EUR 15,000 as an individual or EUR 75,000 as a company to another Cyprus account every month.
Again, this will not affect many people. The average salary in Cyprus is EUR 2,000 per month, so few people are going to have the means to transfer any more.
Other things have also got easier. At one stage I could only transfer money online between my own bank accounts, then only to other Bank of Cyprus customers.
At the end of August, it added other banks and with that change, my bank transaction life is fully back to normal.

For whom is a Cypriot euro not a German euro?
Given all the measures that allow companies to do businesses, and the fairly low salaries in Cyprus, one can safely assume that the only people whose purchasing power is really affected by capital controls are the wealthy.
They can afford to spend more than EUR 5,000 abroad with their cards or take more than EUR 3,000 in cash (the EU-wide limit is in any case EUR 10,000) but are prevented from doing so.
But wealthy Cypriots have always kept money abroad, and wealthy non-Cypriots are likely to be customers of the freed-up international banks, so they are unlikely to be seriously affected by the controls.

Capital controls affect savings accounts the most
That does not mean to say that capital controls have no effect. There are plenty of pain in the neck controls on what you can do with saving accounts. But given that the vast majority of us can buy what we need when we need, this is something that affects our liquidity, not our purchasing power.
So saying that a Cypriot euro is not the same as a German euro, when interest rates made their value different from day 1 in any case, is looking in the wrong place for the problem.

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