When the Cypriot government instituted capital controls for the first time in the eurozone's history, some commentators predicted that the measures would produce a change in the direction of the ongoing debt crisis roiling Europe. However, according to figures released by the island nation's central banking authority, money that authorities had sought to keep within Cyprus has reportedly been flooding out in greater numbers.
During March, Zero Hedge writes, 3.8 billion euros were withdrawn from either domestic or overseas accounts from Cypriot banks. This was anticipated following the establishment of controls. However, in April, 6.4 billion euros fled the nation, accounting for roughly 10 percent of the entire deposit base in the country.
Why is this bad? Because Cyprus was forced to "bail-in" its banks after international scrutiny exposed unsustainable debt-to-asset levels and provoked Russian investors into pulling their money out for good. The emergency cash that the Cypriot government received from the European Central Bank (ECB) was based on the premise that any other funding shortfall the island's banks may experience in the future. These outflows prove that more assistance may be needed in the future, which in turn may cause more deterioration in both investor sentimentand economic growth.
At this point, it remains unclear if these deposit outflows will continue, drop off or, even worse, intensify. As the European Union continues to weaken under the strain of recession, it's not certain how ECB officials will react to these latest findings.
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