OUR THINKING

OUR
THINKING

In the last 40 years the world has seen an unprecedented degree of financial freedom, liberalism and internationalism which has allowed capital to move freely from country to country. This has not always been the case prior to this present situation international movements of people and money were far more restricted.

Many western European countries implemented exchange controls in the years immediately following World War II.

During the 1930s, limits on the cross-border flow of capital became commonplace in countries with major economic problems stemming from the Great Depression. Leading on after World War II with the introduction of the Bretton Woods system, capital controls became an accepted part of the global financial system.

Then in 1971, US President Richard Nixon broke the dollar’s convertibility with gold and unleashed the era of fiat money, which saw countries with floating currencies gradually lift controls. During the 1980s and ‘90s, with the arrival of the Thatcher and Reagan governments, a new progressive international thinking emerged.

It was pretty much generally agreed by economists that the removal of capital controls was advantageous for economic growth by allocating capital to take advantage of the best rates on offer. The West greatly benefited from these capital flows and the capital control measures were gradually phased out, as the post-war economies on the continent steadily strengthened; the United Kingdom removed the last of its restrictions in October 1979.

Cyprus Banking Crisis of 2013

But, let us not forget how easily they can return. Remember the Cyprus banking crisis of 2013, when Cyprus faced a severe banking crisis that sent shockwaves across Europe. This financial collapse was largely triggered by Cypriot banks’ heavy exposure to Greek debt, which was devastated by the Greek debt crisis in 2012. With the banking system on the brink of insolvency, Cyprus sought a €10 billion bailout from the European Union (EU) and the International Monetary Fund (IMF).

What made this deal controversial was the "bail-in" of depositors. Unlike traditional bailouts, where external funds cover losses, this deal forced depositors with more than €100,000 in their accounts to contribute to the bank recapitalization. Depositors in Laiki Bank lost most or all of their savings, while those in the Bank of Cyprus had part of their deposits converted into bank shares.

Capital Controls: Preventing a Financial Meltdown

To avoid a run on the banks and further destabilisation, Cyprus imposed strict capital controls—the first time such measures were implemented in a Eurozone country. These controls included daily withdrawal limits, restrictions on transferring funds abroad, and bans on cashing checks. While capital controls stabilised the financial system, they came at a significant economic cost, contributing to a deep recession.

The 2013 Cyprus banking crisis was a turning point in European financial history, introducing the concept of depositor bail-ins and highlighting the risks of an oversized banking sector reliant on foreign capital. The crisis also demonstrated how capital controls could be used as a last resort to prevent financial chaos, though they came with long-term economic consequences.

Moving Towards Future Capital Controls

Other countries have implemented them more recently such as India, Argentina, Russia, Iceland and Greece. In March 2022 the International Monetary Fund (IMF) made two very significant, but largely unreported, policy decisions:

Nations can implement capital control measures pre-emptively.

Capital controls can now be implemented for national or international security.

These changes represent a major break with previous policies and could have huge future implications for the free movement of capital across borders.

‘Praemunitus praemunitus’. Forewarned is Forearmed

The Latin proverb ‘Praemunitus praemunitus’ is as important today as it was in ancient Rome. Those who know that something is coming are better prepared to face it than those who do not know. Knowledge in advance enables one to be prepared.

Of course, no one can accurately predict the future and we can only pass on what we believe could happen and take steps to avoid it. It is better to be prepared than not. As of the current time, we believe that the world is moving back in this direction of capital controls and that having your wealth in a single jurisdiction is no more prudent than having all of your wealth invested in one asset class. In fact, we feel strongly that since the aftermath of World War II and the days of capital controls, it has never been more important to insure the jurisdictional diversification of wealth. We can help you to build and maintain structures to do this legally and efficiently and in compliance with the rules of your home jurisdiction.

Our belief in financial freedom is the core of our ethos and we are at the forefront of designing and providing bespoke holistic financial structures to protect your wealth from changes of approach to private ownership of wealth in your home country, either through penal taxation regimes or even capital controls.

Alpha welcomes new clients and is here to help you protect your wealth.