…Cyprus example. Deposits continue to shrink (read: disappear from the country) in the country’s banking system. As the Wall Street Journal last week cited the European Commission as reporting [emphasis added],
the radical shake-up of the banking sector coupled with unprecedented restrictions on the movement of capital in and out of the tiny island have left it exposed to deep economic pitfalls.
Confidence in Cyprus’s banks has plunged after the bail-in of depositors, culminating in the gradual flight of deposits despite the government’s imposition of capital controls to stem the outflow[.]
Why? Not despite the government’s controls, but because of them. The Cypriot government
appropriate[ed] all uninsured deposits above €100,000 [$135,000] to pay for [Cyprus Popular Bank]’s resolution. The biggest bank, Bank of Cyprus, underwent a long, deep restructuring, during which 47.5% of uninsured deposits were blocked and then converted into shares in the new bank.
Whether the depositors wanted a slice of a failing bank or not. Whether that slice could be used to put food on a depositor’s table, or pay his rent, or not.
People found a way to get their money and get it out of the government’s reach. And now it’s hard to find money to loan, even to a willing borrower. Because there’s no money to lend to support business expansion, it’s hard to hire. Because there’s no money to lend to roll existing debt, bankruptcies occur, and jobs are lost. Because there’s no money to lend to cover the time gap between payouts due (e.g., existing debt or payroll) and money arriving (e.g., payments for goods sold), bankruptcies occur. And so on.
17% of the Cypriot workforce would be out of a job this year [reported the EC], up from an original projection of 15.5%, while unemployment will hit 19.6% in 2014, not 16.9% as previously thought.
The wages of government controls are lost jobs.