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Generational Dynamics Web Log for 28-Mar-2013
28-Mar-13 World View -- Cyprus's banks reopen on Thursday with harsh 'capital controls'

Web Log - March, 2013

28-Mar-13 World View -- Cyprus's banks reopen on Thursday with harsh 'capital controls'

China conducts naval military drills deep into South China Sea

This morning's key headlines from

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 and flying swarms. Each swarm is made up of billions of plant-devouring insects. The plague now threatens 60 per cent of the country's rice production, a staple crop in Madagascar, where 80 per cent of the population lives on less than $1 per day. The locust swarms are also consuming green vegetation that might normally serve as pasture for livestock. The U.N. Food and Agriculture Organizations (FAO) is asking 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 time in almost two weeks, under harsh restrictions designed to prevent money from leaving the country. Large depositors will lose 40-80% of their principal, depending on which bank the account is in. Individuals will be limited to 300 euros per day withdrawals. The strict limits on credit cards and checks will make their use almost impossible. Individuals leaving the country may not take more than 3000 euros with them. The controls are supposed to expire within a week 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 prove to government-appointed officials that money transfers are OK.

The capital controls could last weeks, months or years, in complete violation of European Union market rules. So analysts point out that these rules in effect create a "Cyprus euro" that's different from the regular euro, and has a different exchange rate. According to one analyst:

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

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

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

Will Slovenia be the next Cyprus?

Slovenia's Prime Minister Alenka Bratusek says that the country is different from Cyprus, although the country's banks are deeply in debt and will require 4 billion euros in funding to avoid bankruptcy this 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 Cyprus aren't valid. Deposits here are safe and the government is guaranteeing them."

Unfortunately, this is laughable. Deposits were safe and government-guaranteed in Cyprus until three weeks ago, but things changed overnight. And we know from experiences with Greece, Spain, Portugal and others that every country's president or prime minister ALWAYS says that they don't need a bailout -- and they say it up until a nanosecond 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 taxed in Cyprus, though finally they were safe, provided that you don't want to withdraw your money. But accounts over 100,000 euros were confiscated at the rate of 40-80%. So small deposits in Slovenia may or may not be safe, but people with a large bank accounts in Slovenia, including Slovenia's citizens, should be thinking very hard about getting 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 weak countries. As he was saying those words, China's navy was bullying Malaysia, deep into the South China Sea. James Shoal is an island 50 miles from the coast of Malaysia, clearly within Malaysian waters. But China has sent a naval flotilla, including China's most advances amphibious landing ships, to take military control of Malaysia's island. Last week, a Chinese naval vessel fired flares at a Vietnamese fishing boat that was returning from a fishing ground near the Paracel Islands in the South China Sea. The flares caused the boat to catch fire, although no one was hurt. China announced last year that in 2013 it would start boarding and taking control of other countries' ships in the South China Sea. AP and VOA

(Comments: For reader comments, questions and discussion, see the 28-Mar-13 World View -- Cyprus's banks reopen on Thursday with harsh 'capital controls' thread of the Generational Dynamics forum. Comments may be posted anonymously.) (28-Mar-2013) Permanent Link
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