Tuesday 21 May 2013

Differential Euros - how a French euro can be worth more than a Cypriot euro?

As we approach the final stages of EU governments’ efforts to agree to use bank deposits exceeding €100,000 as a means of ‘bailing in’ or rescuing ailing banks, clients have asked for an explanation of how this can result in differing values for a euro within the EU.

When a government raids depositors savings accounts, those who can do so try to move their money overseas. The government is obliged to ban currency transfers to prevent such ‘exporting’ of savings and avoid a run on the banks….

Suppose a Frenchman, Pierre, wants to sell his holiday home in Cyprus for €200k.
He has two bank accounts, one in Paris and one in Cyprus.
Nikos, a Cypriot citizen living in Cyprus, wants to buy Pierre’s holiday home.
He also has two bank accounts, one in Cyprus and one in Paris, but wants to pay via his Cyprus account i.e. in Cypriot euros.
Pierre wants to be paid via the French bank i.e. in French euros, to avoid having the money locked in Cyprus, because of the currency controls.
If Nikos insists on paying in Cypriot euros, then Pierre wants an additional €50k for the flat, as compensation for the risk of tying up his money in Cyprus. 

Therefore Cy€250k is worth Fr€200k …. 

Thinking ahead...
In other words, if it looks like a major bank in the EU needs re-capitalising, and a government bans currency exports, then local euro devaluation follows by default, as the government helps itself to depositors’ savings, like in Cyprus…

Watch this space… 

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