“Cyprus is on the verge of an unprecedented financial experiment: imposing controls on money transfers in an economy that doesn’t have its own currency.
Countries from Argentina to Iceland have used similar measures in the past to defend against devaluation. Being part of the euro zone may make it harder for the Mediterranean island to enforce restrictions, as any money that leaves the banking system can be taken out of Cyprus without losing value.
That also may make it more difficult to meet the goal set yesterday by Finance Minister Michael Sarris to lift any controls in “a matter of weeks.” When economies in Asia and Latin America tried to stem the outflow of money in the 1980s and 1990s, they ended up keeping the measures in effect for six months to two years. Iceland, another island nation with an outsize banking system, still has capital controls five years after its banks collapsed in 2008.
“Thanks to political mismanagement, we now have a first: capital controls in the euro zone,” said Nicolas Veron, a senior fellow at Bruegel in Brussels and a visiting fellow at the Peterson Institute for International Economics in Washington. “How long is temporary? It could turn out like Iceland, extending to many years.”
