One Euro or Two?

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 some economists that the capital controls create a Cypriot euro that is different from the euro elsewhere in the monetary union.
 While we understand the  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 not out banks.  There were numerous exemptions granted to businesses, and for the imports of medicine, for example.  Those euros were also inseparable from other euros in the system.

One group of analysts writing for a one 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.
It is 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.

This piece is cross-posted from Marc to Market with permission.

6 Responses to "One Euro or Two?"

  1. eft   March 27, 2013 at 3:43 pm

    As a person living in Cyprus I can tell you that in effect they are creating two euros. The capital controls in place effectively reduce the actual value of my money in the bank since I am restricted in the manner quantity(amount) and quality (where) I spend it. The problem gets increased the more money you have in your bank account(if that's an indication of someones affluence) restricting ones ability to use their money as they wish. Exceptions are being made for business but not individuals. Furthermore which idiot would bring his money inside the country and deposit them in any account if he will not be able to take them back out if he pleases.

  2. bob   March 28, 2013 at 5:29 am

    Question to people in Cyprus: is there a fear that a Euronote with the prefix G will become a Cypriot only Euro and therefore perhaps lose value compared to say German Euronote?



  3. EzioP1   March 28, 2013 at 9:14 am

    It seem to me that the matter of one or two euro is just political. In every country there are regions where the worth value is higher than in other ones but there are not two different currency. The different value is dependent on the economy status hence on agriculture, manufacturing, service, etc. mix and levels. The proposal of making two different euro seems just oriented to balance the advantages of the countries that get their euro by providing poor content services at a high price (due to the single currency), being their country at a low level of development, and being able or having the potential to buy higher value products from other countries. With a second type of euro currency at a lower level versus the first one, the quantity of euro cumulated by the low developed countries will get balanced via the two euro conversion rate. In a certain sense this mechanism will create incentive to development and more social equity.

  4. mgfletcher1   March 28, 2013 at 9:31 am

    The one euro or two debate is somewhat academic.
    "Eventually" capital controls will be lifted and then it will be one euro. However, anyone who thinks controls will be lifted within weeks or months is fooling themselves. Trust in the Cypriot banking system has been broken. Those with large sums of money will not be able to get their money out quickly enough, after they have suffered a large 'haircut'
    No-one can believe that the ECB via ELA or any other mechanism is going to facilitate the flight of that money to safer shores. My guess is that it will be years before controls are lifted. The Cypriot banks' reliance on deposits means they will be starved of liquidity with little inflow of new money and a 'wall'of money wanting to exit asap.

  5. BWilds   March 31, 2013 at 2:37 pm

    This should be viewed as a watershed event, we are entering into a new world where savings are far less safe. What we must fear is that, in a future financial crisis, retail depositors worried that some of their supposedly guaranteed accounts would be confiscated will stage bank runs, making the crisis worse. In Cyprus, the government declared a “bank holiday,” shutting banks to prevent massive withdrawals. It's the perfect irony that when the government screws up it then punishes the people who were prudent enough to have saved some money by stealing from them. For more on the potential of a bank run and the Euro please read my post below.

  6. 392j   April 2, 2013 at 2:49 pm

    I find this remarkable. As was related to me recently by a friend in Cypress the private market is at work devaluing Cypriot Euros as we speak. How…well quite simple. Lets say I being a person of forethought withdrew about 1/2 to 3/4 of my deposits in Cypress banks some in cash and some elsewhere. Today I can offer to exchange my euros for a check in the amount of 4 times the cash I am giving to the other person provided my deposit account is less than 100k. In other words the market is filling the void by devaluing the euro's present in cypress banks.