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Forex Flash: The contradiction between Cypriot capital controls and monetary union - BBH

FXstreet.com (Barcelona) - Brown Brothers Harriman analysts note that many observers, including some banks, are emphasizing the obvious contradiction between capital controls in Cyprus and the currency union.

They write, “Yet, we do not think the die has been cast yet-- and do not see the capital controls as necessarily tearing the euro zone asunder or prelude to a Cypriot exit.” They continue to add that Nobel Prize winning economist Paul Krugman has called for Cyprus to leave, but they are not convinced. More importantly, the Cypriot people are not convinced that exiting would be better, according to polls. They write, “The Cypriot crisis is not a traditional balance of payments problem that can be resolved by currency devaluation, though unit-labor costs have risen. It does not have the manufacturing capacity to increase exports to fund its debt servicing. Its claim on the oil and gas fields is difficult, if not impossible, to enforce given the island's division and the unresolved dispute with Turkey.”

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