Cyprus Capital Controls: New Post-Credit Crisis Rescue Rules

Cyprus is close now to finalising a rescue deal with the EU. These are the key aspects:

– Wind down the worst bank(s)

– Probably defend the deposit insurance plan so that accounts less than Eur100k are protected in theory

– Tax larger deposits

– Capital controls

After all that has happened, people want to get their money out. But we all know what happens if everyone draws their money out the bank at the same time – the result would be massive losses for everyone.

So, Cyprus will put in place strict capital controls to prevent money from leaving.

This is against EU law, and an exception will be made.

But after Iceland, financial theory now considers such controls to be acceptable in this kind of situation. (Iceland didn’t impose capital controls and so the banks crashed and the losses were higher and uncontrolled.)

What does it mean for us? It likely means the risk of markets going down is not over just because Cyprus has a deal.

What does it mean for clients? If they still have money in Cyprus they won’t recover it.

What can you do to help them? Distressed debt funds will be ready to buy frozen assets at a discount. If you want more information please contact me.

Have a good weekend

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