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Cyprus banks remain closed to prevent run on deposits Cyprus banks remain closed to prevent run on deposits
(about 2 hours later)
All banks in Cyprus are to remain closed at least until Thursday and will then be subject to capital controls to prevent a run on deposits. Banks in Cyprus will remain closed at least until Thursday and will then be subject to strict controls to prevent a bank run in the wake of the island's €10bn (£8.5bn) bailout.
The island's central bank had planned to open on Tuesday all but the biggest two banks – Laiki, also known as Cyprus Popular Bank, and Bank of Cyprus. However, it reversed its decision late on Monday night, saying they will remain shuttered to ensure the whole banking system functions "smoothly". All but the country's two biggest banks were slated to open on Tuesday, but the central bank now says all lenders will remain closed to ensure the banking system functions "smoothly". Asked whether Cyprus's banks will reopen on Thursday, Cyprus's finance minister Michalis Sarris said: "Yes, I think they will."
The plan now is to reopen the banks on Thursday but even that appears to be in doubt. Asked on BBC Radio 4 on Tuesday morning if the banks would open soon, Cyprus's finance minister, Michalis Sarris, said: "Yes, I think they will." Speaking on Radio 4's Today Programme, Sarris said capital controls will be imposed on Cyprus "for several weeks", restricting the flow of money around the system.
President Nicos Anastasiades said that "very temporary restrictions" would be put on capital flows, although he gave no details. The freezing of the Cypriot banking system follows an international rescue deal that involves restructuring the country's two largest lenders, with heavy losses for wealthy savers. President Nicos Anastasiades acknowledged on Monday that the country had come "a breath away from economic collapse" before its last-minute bailout.
Fears that bank accounts could be raided in any future eurozone bailouts spooked the financial markets on Monday, as Cypriots prepared for their banks to reopen for the first time in over a week on Thursday after a deal to secure a €10bn (£8.5bn) lifeline. This involved an agreement to radically restructure the country's largest lender, the Bank of Cyprus, and shut down its second largest bank, Laiki, in return for a €10bn bailout from the European Union, the European Central Bank and the IMF.
Markets took fright after the head of the group of eurozone finance ministers indicated that the Cyprus rescue could be a template for similar situations. Cyprus is the first of five bailouts in the eurozone where depositors have been hit. In a radical departure for a eurozone bailout, depositors in Laiki Bank could lose any savings above €100,000. Bigger savers in Bank of Cyprus will also be forced to contribute to the lender's recapitalisation. Sarris suggested on Monday they could face losses of around 40% on their assets.
"What we've done last night is what I  all pushing back the risks," Jeroen Dijsselbloem, the Dutch finance minister, told Reuters and the Financial Times after clinching a deal for Cyprus. "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said. After an initial rally on relief that Cyprus had secured a deal, markets took fright when the head of the group of eurozone finance ministers indicated that the rescue could be a template for similar situations.
Laiki is to be split into a good and bad bank with a levy of potentially 40% imposed on accounts of more than €100,000. The euro dropped 1% against the dollar on Monday and remained below $1.29 in early trade on Tuesday. Shares across the eurozone regained some of their losses. The FTSE 100 was up 0.1% and the German DAX was 0.3% higher, but Spain's IBEX was 0.4% lower in early trade.
A big percentage of those deposits belong to Russians. On Monday, the Russian president, Vladimir Putin, said there would be a deal to rework the terms of a €2.5bn loan to the Mediterranean island, which had become attractive for its low tax regime and lax vetting laws. Jeroen Dijsselbloem, the Dutch finance minister who heads up the euro group, said the relative market calm in recent months, coupled with the lack of market panic following the decision to force private investors and depositors to pay for the bailout of two large Cypriot banks, allowed the eurozone to go after private money more aggressively when banks failed. He later attempted to water down these remarks, indicating that Cyprus was a unique case.
Anastasiades made a televised address in which he admitted that measures would be in place to stop money pouring out of the banks when they reopen. "The central bank will implement capital controls on transactions. I want to assure you that this will be a very temporary measure that will gradually be relaxed," he said. The deal is designed to shrink the Cypriot banking sector, which had grown to eight times the country's €17bn economy. Finance minister Sarris said to Bloomberg on Monday: "We acknowledge that we allowed things in Cyprus to get out of hand."
Markets were initially buoyed by news of the "painful" bailout for Cyprus, clinched late on Sunday night following threats by the European Central Bank to switch off liquidity to Cypriot banks, which, carried by international deposits, had grown to eight times the €17bn economy. But he said Cyprus was disappointed by the reaction of some of its eurozone partners, when faced with the potential meltdown of its economy. "This is the European Union. It is supposed to be a community, where you get support from your partners. We got some from some partners; there was a definite hardline from others."
But markets reacted badly later in the day after Dijsselbloem's remarks. As markets tumbled, he issued a clarification insisting that bailout programmes were "tailor-made" and that "no models or templates are used". The atmosphere in the negotiating room on Sunday night was, he said, "very, very tense". He added: "We felt under tremendous pressure. When you know that the alternative to reaching a solution would be that your economy is destroyed, that it turns into ruins, you clearly are at a definite disadvantage."
Nevertheless, all markets erased their early gains to close down on the day. The FTSE 100 index lost 0.2% and the German stock market fell 0.5%. Bank shares fell across Europe while the euro, which had nudged up through $1.30 initially, fell back to below $1.29. US markets, which had largely shrugged off the Cypriot problem, were also lower, with the Dow Jones Industrial Average down over 70 points, 0.5%. Cypriots had reacted to the agreement with relief as it appeared that at least deposits below €100,000 had been spared the levy. In the streets and cafes of Nicosia, and on TV chat shows, the feeling was that the country had been saved but at a high price. On Tuesday, schoolchildren spilled onto the streets to protest against the bailout deal.
Cypriots had reacted to the agreement with relief as it appeared that at least deposits below €100,000 had been spared the levy. There were warnings the impact could reach beyond Cyprus, particularly with repercussions from Russia, where the prime minister, Dmitry Medvedev, speaking on Monday, said: "They are continuing to steal what has already been stolen." This was a phrase Lenin used to answer the allegation that the Bolsheviks were thieves. Russian officials have repeatedly compared the Cypriot bank levy to Soviet-era expropriation.
In the streets and cafes of Nicosia, and on TV chat shows, the feeling was that the country had been saved but at a high price.
The interior minister, Sokratis Hasiko, encapsulated the mood, describing the EU-IMF-backed bailout as the best of a bad range of choices.
"We had got to the point where we were discussing a [depositor] haircut of between 50 and 60%," he said, adding that the Cypriot parliament's rejection of the first accord, with its highly controversial levy on depositors big and small, had been hugely negative for the country's banks. "So this is the best we could get."
There were warnings the impact could reach beyond Cyprus, particularly with repercussions from Russia, where the prime minister, Dmitry Medvedev, said: "They are continuing to steal what has already been stolen." This was a phrase Lenin used to answer the allegation that the Bolsheviks were thieves. Russian officials have repeatedly compared the Cypriot bank levy to Soviet-era expropriation.
"For sure there is anger," said Marios Cosma, head of K Treppides, a firm that serves international clients, mainly rich Russians. "For the first time in Europe, you have a situation where depositors are being called to 'bail in'.""For sure there is anger," said Marios Cosma, head of K Treppides, a firm that serves international clients, mainly rich Russians. "For the first time in Europe, you have a situation where depositors are being called to 'bail in'."
While the Cyprus' banking sector has exploded, other countries have even larger banking sectors relative to GDP. Malta's and Luxembourg's banking sectors are relatively larger, more than 20 times' GDP in the case of Luxembourg. Malta's finance minister wrote an article in the Malta Times expressing concern about what would happen if it encounters similar problems in the eurozone. While the Cyprus banking sector has exploded, other countries have even larger banking sectors relative to GDP. Malta's banking sector is relatively larger, and Luxembourg's is more than 20 times its GDP. Malta's finance minister wrote an article in the Malta Times expressing concern about what would happen if it encounters similar problems in the eurozone.
In Cyprus there were calls for a referendum on the bailout package. "It is illegal and undemocratic," said Christos Tombazos, general secretary of the Pancyprian Federation of Labour. "We're talking about massive changes to the banking system. It should go to referendum for the Cypriot people to decide."In Cyprus there were calls for a referendum on the bailout package. "It is illegal and undemocratic," said Christos Tombazos, general secretary of the Pancyprian Federation of Labour. "We're talking about massive changes to the banking system. It should go to referendum for the Cypriot people to decide."
Russian officials tried to assuage fears over its nationals' investments in Cyprus. Russian Commercial Bank, a wholly owned subsidiary of state-owned bank VTB, would "not be affected or its losses will be insignificant", said Igor Shuvalov, a deputy prime minister.Russian officials tried to assuage fears over its nationals' investments in Cyprus. Russian Commercial Bank, a wholly owned subsidiary of state-owned bank VTB, would "not be affected or its losses will be insignificant", said Igor Shuvalov, a deputy prime minister.
The Bank of Cyprus is 9.7% owned by Dmitry Rybolovlev, a Russian based in Monaco whose wealth is estimated at $9.1bn, according to Forbes.The Bank of Cyprus is 9.7% owned by Dmitry Rybolovlev, a Russian based in Monaco whose wealth is estimated at $9.1bn, according to Forbes.
One Russian oligarch, Alexander Lebedev, played down the amount he stood to lose in Cyprus as no more than $10,000. "It's not worth talking about," he said. "Cyprus was always a transit jurisdiction – money would pass through and then go to Lithuania, Latvia, Belize, Switzerland, everywhere. There are plenty of ways [to avoid capital controls], they can split accounts."One Russian oligarch, Alexander Lebedev, played down the amount he stood to lose in Cyprus as no more than $10,000. "It's not worth talking about," he said. "Cyprus was always a transit jurisdiction – money would pass through and then go to Lithuania, Latvia, Belize, Switzerland, everywhere. There are plenty of ways [to avoid capital controls], they can split accounts."
The multimillionaire owner of the Evening Standard and Independent expressed doubts that capital controls to be imposed by the Cypriot government in order to stem a bank run would work. "Certain schemes can be put into place," Lebedev said by telephone from Moscow. "This is how Cyprus was making money."The multimillionaire owner of the Evening Standard and Independent expressed doubts that capital controls to be imposed by the Cypriot government in order to stem a bank run would work. "Certain schemes can be put into place," Lebedev said by telephone from Moscow. "This is how Cyprus was making money."