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The EU Provision which will allow capital controls in Cyprus is Article 65(b)

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After one and all learned that the ECB’s Jörg Asmussen believed Laiki Bank could not meet ELA guidelines, it meant that Laiki Bank could never open for business unless there was a successful bailout vote which recapitalized the institution. Otherwise there would be a bank run. There could still be a bank run even if Laiki is recapped. That made it clear to me that capital controls were going to happen. The question was what justification would be used. Karl Whelan of University College Dublin noted by Twitter tonight that the exemption is contained in “The Treaty on The Functioning of the European Union“. He pointed to Article 65(b) in which “The provisions of Article 63 shall be without prejudice to the right of Member States“:

to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.

Once these controls are in place they will be hard to take away, as we have seen in Iceland. More shortly for subscribers after the jump.

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.