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World View: Cyprus's Banks Reopen with Harsh 'Capital Controls'

World View: Cyprus's Banks Reopen with Harsh 'Capital Controls'

This morning’s key headlines from GenerationalDynamics.com

  • Madagascar faces food crisis over locust plague
  • Cyprus’s banks reopen on Thursday with harsh ‘capital controls’
  • Will Slovenia be the next Cyprus?
  • China conducts naval military drills deep into South China Sea

Madagascar faces food crisis over locust plague

Locust swarm in Madagascar (FAO)
Locust swarm in Madagascar (FAO)

About half of Madagascar is currently infested by hopper locusts andflying swarms. Each swarm is made up of billions of plant-devouringinsects. The plague now threatens 60 per cent of the country’s riceproduction, a staple crop in Madagascar, where 80 per cent of thepopulation lives on less than $1 per day. The locust swarms are alsoconsuming green vegetation that might normally serve as pasture forlivestock. The U.N. Food and Agriculture Organizations (FAO) isasking for $41 million to fight the plague through aerial spraying.U.N. FAO

Cyprus’s banks reopen on Thursday with harsh ‘capital controls’

Banks in Cyprus will open their doors on Thursday for the first timein almost two weeks, under harsh restrictions designed to preventmoney from leaving the country. Large deposits will lose 40-80% oftheir principal, depending on which bank the account is in.Individuals will be limited to 300 euros per day withdrawals. Thestrict limits on credit cards and checks will make their use almostimpossible. Individuals leaving the country may not take more than3000 euros with them. The controls are supposed to expire within aweek or two, but that claim seems to be contradicted by another rule:students abroad cannot receive more than 10,000 euros per quarter.Procedures will be set up for companies doing business abroad to proveto government-appointed officials that money transfers are OK.

The capital controls could last weeks, months or years, in completeviolation of European Union market rules. So analysts point out thatthese rules in effect create a “Cyprus euro” that’s different from theregular euro, and has a different exchange rate. According to oneanalyst:

“If you were to impose restrictions equally on capitaltransfers and payments [in Cyprus], then economically a Cypruseuro would be a different currency vis-a-vis a non-Cyprus euro.

You would have to buy non-Cyprus euros to pay for goods andservices in other countries. With the rules of supply and demand,the Cyprus euro could then take on a different exchangerate.”

This two-level euro situation is going to cause major distortions inEurope’s markets. If the controls are in place only a few weeks, thenit will be OK. But if they go on for months, then there will be majorproblems. Cyprus Mail and Reuters

Will Slovenia be the next Cyprus?

Slovenia’s Prime Minister Alenka Bratusek says that the country isdifferent from Cyprus, although the country’s banks are deeply in debtand will require 4 billion euros in funding to avoid bankruptcythis year.

According to Bratusek:

“Slovenia won’t need aid, we can do this on our own.Our banking system is stable and safe and comparisons with Cyprusaren’t valid. Deposits here are safe and the government isguaranteeing them.”

Unfortunately, this laughable. Deposits were safe andgovernment-guaranteed until three weeks ago, but things changedovernight. And we know from experiences with Greece, Spain, Portugaland others that every country’s president or prime minister ALWAYSsays that they don’t need a bailout — and they say it up until ananosecond before they ask for a bailout.

So where is Slovenia going to get the 4 billion euros it needs?The plan is to sell bonds — that is, go more deeply into debt.Unfortunately, we’re already seeing a familiar pattern,in that Slovenia’s bond yields are starting to surge.

Insured bank accounts of under 100,000 euros came close to being taxedin Cyprus, though finally they were safe, provided that you don’t wantto withdraw your money. But accounts over 100,000 euros wereconfiscated at the rate of 40-80%. So small deposits in Slovenia mayor may not be safe, but people with a large bank accounts in Slovenia,including Slovenia’s citizens, should be thinking very hard aboutgetting their money out while they can. Bloomberg and Washington Post

China conducts naval military drills deep into South China Sea

China’s president Xi Jinping has been in Africa the last few days,telling people that China opposes strong countries bullying weakcountries. As he was saying those words, China’s navy was bullyingMalaysia, deep into the South China Sea. James Shoal is an island 50miles from the coast of Malaysia, clearly within Malaysian waters.But China has sent a naval flotilla, including China’s most advancesamphibious landing ships, to take military control of Malaysia’sisland. Last week, a Chinese naval vessel fired flares at aVietnamese fishing boat that was returning from a fishing ground nearthe Paracel Islands in the South China Sea. The flares caused theboat to catch fire, although no one was hurt. China announced lastyear that in 2013 it would start boarding and taking control of othercountries’ ships in the South China Sea. AP and VOA

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