South Cyprus faces deep recession

The South Cyprus banking system is due to reopen tomorrow morning. Ahead of them there will be capital controls imposed in an attempt to stop a panic exodus of funds from the banking system.

Meanwhile, businesses have struggled to keep going, particularly since the opening of all but two of the banks was delayed until Thursday. The current situation is a shambles and reflects poorly on the Greek Cypriots and EU politicians.

On Tuesday, Andreas Artemis, the Chairman of the Bank of Cyprus resigned, along with four board members. This was in protest that government measures for their bank had been pushed through without their consultation or approval. Their resignations have not been accepted and they have all been given a week to reconsider.

The closure of Laiki bank and asset write-offs that will follow for larger depositors at the bank of Cyprus, will shrink the financial sector by half this week. There will be draconian capital controls installed today to prevent a flight of capital. Details are still being hammered but they will include small weekly cash withdrawal limits, restrictions on transferring funds out of Cyprus, reduced limits on credit and debit cards and a complete prohibition on the use of cheques. In addition fixed term deposits will be forcibly renewed. It is also claimed that private security guards will be in place at banks tomorrow in case there should be any public disorder.

The imposition of all these measures will drag the already weak economy further into recession. It is difficult to see how these controls will work effectively because unlike other major capital controls such as in Iceland, which has its own currency, Cyprus is part of the Eurozone. There are ways and means of taking capital out of the country via trade for example and once a Cyprus euro gets out of Cyprus its value is the same as any other Euro. No system is leak-proof.

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