Bailout of Cypriot banks taking shape

Legislation passed by the legislature in Cyprus places capital controls on currency. Full plans to rescue the banking sector are still on the drawing board.

The short description of the capital restrictions from the Wall Street Journal:

The proposals will allow authorities to restrict noncash transactions, freeze check cashing, limit withdrawals and even convert checking accounts into fixed-term deposits.

That means the government can restrict how much can be withdrawn, either by check, wire transfer, or in currency. Also gives the government authority to freeze deposits by converting some of them into a time deposit.

The capital controls are a big deal. In my opinion, that moves Cyprus down to the level of some developing countries that restrict how much money can be moved in or out.

Other plans under discussion involve splitting the second largest troubled bank into a good bank/bad bank. Haven’t seen any details how that will work.

Other floated ideas would be to give depositors in the troubled banks with deposits over the insured limit of €100K a 40% haircut or levying a 1% “tax” on every depositor in the country.

I think that first idea is the best I’ve heard – your deposits over the insured limit are at risk so you should be careful where you deposit your funds.  That second idea, a 1% so-called tax on everyone  in the country continues the idea that your deposits belong to the government and they merely need to decide their cut.

It’s still very much in the air whether the plans will work to salvage the banking system by start of business Tuesday (Monday is a prescheduled banking holiday in the country).

Articles of interest:

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