NEW YORK (TheStreet) -- I could never have expected Cyprus could be the birthplace for so many very creative, world-changing ideas and bold, history-making experiments. Right after the Dijsselbloem Template for solving banking crisis the fair and just way, which was announced, promptly retracted, and consequently firmly stuck Monday, now we have an unprecedented capital control within a currency zone, for example, as reported by Reuters.
This is not a surprise after the
. But how this sheds light on the future path of eurozone makes it even more significant.
To summarize, the capital control measures mean flow of money out of Cyprus will be severely impaired, for (supposedly) seven days, but nobody expects it to end so soon.
What happens to the value of currency in a region where only inflow is allowed? It drops, due to sheer supply and demand imbalance even if not considering the inevitable risk aversion and panic. What makes this unprecedented and intriguing is that the currency is nominally the same inside and outside, the euro.
In other words, the euro will be worth less inside Cyprus than outside, quite possibly by a lot, depending on the success of enforcement (the more successful, the bigger the disparity) and degree of panic.
As the capital control is extended, inevitably, and the disparity between the Cypruro and the euro stabilizes, hopefully, it's only logical to give the Cypruro a proper new name, like, I don't know, Cypriot lira has a nice ring to it dontchathink?
This is too predictable to be exciting. Cyprus is lost cause. What's slightly more exciting is to speculate how this could be the template for the proper PIIGS and ultimate unwinding of the whole euro experiment. An awe-inspiring experiment it has been, a testament to the undying audacity of hope deeply embedded in humanity. We came. We tried. We left.
I did not expect the solution to come from Cyprus. It makes perfect sense, though, as the relative insignificance -- not to discount the enormous hardship and anxiety Cypriot people have been suffering over the past two weeks, and will continue to suffer -- of the problem compared to those presented by the infamous PIIGS (Portugal, Italy, Ireland, Greece and Spain). This makes it a better guinea pig for technocrats and politicians in various alphabetic soups of the eurozone institutions and foreign countries to try out a few ideas. If it doesn't work, at least they won't be kicked out of the office.
Please, don't blame me for being heartless. I'm merely trying to be the messenger for the heartless and crooked reality of the euro experiment. And, of all the possible and impossible ways of unwinding the experiment, this -- as messy and painful as it is -- is arguably the least messy and painful one.
Is it at least theoretically possible to sustain the euro? Absolutely. If the people and the politicians have the determination and are prepared to face reality and pay the price. I must say I have been most impressed with the determination the people in eurozone, in both the core and the peripheral, have shown so far. But the politicians have exposed their lack of confidence and determination by running such experiments at the expense of Cypriot people. This is outright betrayal and abandonment.
No matter how strongly the people want to stick with it, the rational thing to do now is to protect yourself. This is one of the cases where a bank run is rational. Move your Euros out of PIIGS to Germany or, better yet, into hard assets such as gold (
SPDR Gold Trust ETF
or -- I thought I'd never say this -- physical gold).
In particular, I would not consider Switzerland a safe haven any more since the oversized banking sector has been increasingly under attack for tax evasion as all developed world scramble for money. Yes, the Swiss Franc may still be considered a risk-off destination but I suspect the upside is almost zero considering the central bank intervention and the rapid erosion of tax haven status. We might be much closer to a Swiss banking collapse than many think.
Widespread panic has yet to set in. But it doesn't hurt to take some chips off the table, at least when the seven-day capital control is extended. To those without any assets in the eurozone, I really don't see any reason to long the
CurrencyShares Euro Trust ETF
or anything European, unless you're a good day trader. I'm not saying it can't go up; I just don't see the risk/reward argument.