5
 

One Euro Or Two?

By  |  Forex  |  Mar 27, 2013 05:47PM GMT  |   Add a Comment
 
AA
+
-

There is a debate among market observers over whether the capital controls in Cyprus mean that there are, in effect, two euros now. It is argued by some investment banks and economists that the capital controls create a Cypriot euro that is different from the euro elsewhere in the monetary union.

The Import Question
While we understand the argument, we continue to demur. We do not think it has to be a theoretical debate. There are indeed some international transactions taking place. For example, companies are allowed to make payments for imported goods, provided documentation is provided to authorities.

Thus far, and we acknowledge that the situation can change, we see no sign that payment of imports is being adjusted for the so-called Cypriot euro. That is to say, despite the polemics, there is not sign at this juncture that the Cyprus euro is being treated differently than euro in the other EMU countries.

We note reports that suggest there was some capital outflows from Cyprus over the past ten days, just from banks. There were numerous exemptions granted to businesses -- and for the import of medicine -- for example. Those euros were also inseparable from other euros in the system.

Same As It Evere Was
One group of analysts writing for a large bank simply assert that the capital controls "create a situation in which a Cypriot euro is not equal to a euro of any other member country from an economic perspective." They then go on to recognize our point: that "the euro bank notes in Cyprus are still worth the same amount as in other countries."

They still want to conclude though that there are two euros. In a market for euro deposits, they say, a euro in a Cypriot bank account "would now most likely not be trading at par with those of other member states." Since such a market, of course does not exist now, this claim can not be tested. It remains a theoretical point.

Divergence Possible
It's possible that the longer the capital controls are in place, the more likely some divergence will take place, as investors get more anxious and are willing to sell their claims for less in order to get access to their money quicker. The government currently suggests the controls will be reviewed after seven days. We suspect that a week from now, that capital controls on some banks may be lifted, though the logistic and administrative challenges at both Bank of Cyprus and Laiki Bank (Cyprus Popular Bank) may mean that those capital controls can persist longer.

By introducing some monthly and quarterly limits, for students studying abroad, for example, or cash transfers for people traveling out of the country, clearly lends itself to the idea that all capital controls will not be lifted in a week's time, or even two weeks.

Nevertheless, our point remains valid that the question of one or two euros is not a theoretical question but a practical one. And as of now there is only one euro.


Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data .

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Add a Comment

 

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Bank of Cyprus
 
 
 
Are you sure you want to delete this chart?
 
 
 
Are you sure you want to delete this chart?
 
 
 

Successfully Reported

Thank you. This comment has been flagged for a moderator.
_touchLoadingMsg