Cypriot Bailout: ‘it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.’

Interesting and scary times in the Eurozone as Cyprus is facing a pretty severe financial collapse, admittedly something that has been on the cards since around July 2011 when an electricity plant exploded on the island, so you would imagine there would have been none of this political sailing close to the cliffs, alas, things don’t work that smoothly in the Eurozone where a rather unique bailout is about to take place. The guys FitzjamesHorse and BangorDub have been mulling over these goings over too.

Larry Elliot over at the Guardian thinks the deal is the best of all the limited options available to the island and the Troika, who knows but we do know it’s not a pretty or great option either:

The new proposal removes the most objectionable aspect of the first package – the levy on all depositors – making it less politically toxic. Money will instead be raised from rich depositors – those with savings of above €100,000 – and bondholders.

That’s all well and good, however, what’s the downside to such measures?

It is not just that the country’s economic model has been destroyed. Nor is it simply that a brutal austerity programme is the condition for the €10bn loan. These will both hurt, but be compounded by a ferocious credit crunch as the banks seek to shore up their balance sheets by lending less and at higher rates of interest. The risk is of a full-scale economic collapse that will result in Cyprus having a debt problem worse than that in Greece.’

So, what else can we expect for Cyprus in this dire hour? Paul Krugman over at the New York Times has something to say on the matter of the day, particularly in relation to something we haven’t seen too much of in the Western world for decades; capital controls:

In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland.’

Mind blowing stuff, especially as we’ve been told that ‘the market’ always knows best as to where to put money. Controls were in place for years after World War II, a period with few if any finacial crises, however, slowly but surely these controls were removed until we had the system you see before you, one where I can pretty much move my money to wherever I want anywhere in the globe, why?:

To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers). But it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.’

But why impose capital controls now? Was it not all the fault of feckless governments or greedy plebs?:

Since 1980, however, the roster [of financial crises] has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.

What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.’

So, for Cyprus and the Eurozone crisis, what else should we expect to see? Elliott sees only massive and untold repercussions:

For a start, any depositor with more than €100,000 in, say, an Italian or Spanish bank, will wake up this morning wondering whether to move it somewhere safer. And in the event that speculation did start to mount about the need for a bailout in another member of the eurozone, those with deposits of less than €100,000 would recall what happened in Cyprus. The risks of a future bank run have increased.

Finally, the Russians who have a total of €20bn stashed away in Cypriot banks are going to be caned by the bailout deal. The chances of retaliation against the eurozone by the Kremlin over the coming months are high.’

Krugman, as always looks for the bigger picture:

I don’t expect to see a wholesale, sudden rejection of the idea that money should be free to go wherever it wants, whenever it wants. There may well, however, be a process of erosion, as governments intervene to limit both the pace at which money comes in and the rate at which it goes out. Global capitalism is, arguably, on track to become substantially less global.’

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One response to “Cypriot Bailout: ‘it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.’

  1. Pingback: Ain’t Nothing Change But The Weather | An Sionnach Fionn·

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