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As my colleague Zsolt Darvas has pointed out, the eurogroup agreement of last night looks pretty good given the circumstances. A number of very important decisions have been taken that need emphasizing.

First, it has been made clear that depositors can make losses but not with an indiscriminate tax. That is good news as distinguishes between the system and the institution. Second, the ECB has confirmed that it is ready to provide liquidity to the Bank of Cyprus. This is crucial so as to allow the Bank to continue operating. Solvability of BoC will be established by a deposit equity conversion, which is again the right way of bailing in depositors. At the same time, the insolvent Laiki bank will be shut down. Third, insured depositors will be protected.

What is the most critical question ahead, which the Eurogroup statement did not fully cover? It is about when and how the banks will be opened again. This relates to the question of capital controls, to which I pointed on Saturday. I cite from the eurogroup statement.

“The Eurogroup takes note of the authorities' decision to introduce administrative measures, appropriate in view of the present unique and exceptional situation of Cyprus' financial sector and to allow for a swift reopening of the banks. The Eurogroup stresses that these administrative measures will be temporary,  proportionate and non-discriminatory, and subject to strict monitoring in terms of scope and duration in line with the Treaty.”

First of all, it is imperative to re-open banks. If all banks are closed in Cyprus, the country does not have a functioning payment system. The eurogroup acknowledges that a swift re-opening of the banks is necessary.

Second, given the close connections between banks, it is necessary to have enough time for the proper re-structuring of Laiki and the re-organisation of BoC. It may therefore be advisable to keep banks closed for a couple of more days.

Third, once the viable banks open up again, many depositors will want to change their deposit structure, inter alia by moving deposits abroad or to different banks. There should be no rules that prevent this from happening. The Eurogroup therefore indeed stresses that the “administrative measures” should be non-discriminatory. If properly applied, this means that Cyprus indeed does not introduce capital controls as deposit transfers among banks will not be hindered depending on their location. Thereby, Cyprus has avoided introducing capital controls.

Fourth, it is important to clarify what the administrative measures contemplated are. Details and semantics matter in this context. There is obviously a need for some administrative measures to prevent a technical collapse of the payment system. For example, the system may be equipped to handle say  1 million payment requests per hour and may fall apart when there are 10 million of such payment requests. For that, an administrative measure to slow down the incoming of payment requests may be warranted. Such a plan would be fully justified. If administrative measure, however, consist of allowing small payments to take place and large payments not to take place, it would be discriminatory and close to capital controls again.

Fifth, it is important, that the eurosystem stands fully ready to replace outflowing deposits with unlimited ECB liquidity. The Eurogroup has now taken a decision on which bank it considers solvent. The ECB needs to provide liquidity to the banks considered solvent and has agreed to do so. In addition, the remaining banks that are not mentioned in the Eurogroup statement should as usually continue to receive ECB liquidity against collateral.

Sixth, some commentators have pointed me to Article 65(1, b), which could allow for capital controls. I am not a lawyer but I would like to make the following observations. Article 63(1) reads: “Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.”  This should be the guiding principle for all capital movements in the euro area and prevent capital controls. Article 65(1b) is quite unclear and actually says that “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.” This may potentially allow for some administrative measures but discriminatory capital controls would certainly be covered by the clause.

Overall, a good deal has been reached given the bad circumstances of end of last week. It is now crucial to provide a credible timeline for the opening of banks. Moreover, the Cypriot authorities should clarify asap what “administrative measures” are exactly contemplated. Those measures should not limit capital flows across Cypriot borders as otherwise they would be capital controls. Capital controls would ultimately mean that a euro anywhere is not a euro everywhere anymore.