NICOSIA, Cyprus -- Cyprus, a palm-fringed island in the Mediterranean Sea, has long held three distinctions: Its economy is the smallest in the European Union, its capital is the farthest from the EU’s administrative center in Brussels and it’s the only EU country in a “frozen conflict,” with Turkish forces occupying the northern third of the country for nearly 40 years.
Now it has another: It’s the only place in the continuing euro currency crisis in which the government has agreed to force bank account holders to help pay for the rescue of debt-ridden banks.
The cost for many savers and businesses would be staggering: as much as 40 percent of accounts that hold more than 100,000 euros ($130,000) in the country’s two biggest banks. Officials here are calling it a “bail-in” as opposed to a bailout. It’s certain to send the local economy into a spiral, impoverishing the nation in a far worse way, most analysts predict, than the EU’s previous bailouts of banks in Greece, Spain, Portugal and Ireland.
There are still many unanswered questions about the “cure,” which was imposed by the International Monetary Fund, the EU and the European Central Bank without a vote of Cyprus’ Parliament.
Under the deal, Cyprus’ Laiki Bank will close, and the Bank of Cyprus will absorb its accounts and the performing loans on its balance sheet. The losing investments in its portfolio will be paid off with $7.5 billion in funds skimmed from large accounts in the two banks.
But who actually will end up footing the bill isn’t known. Will it be Russian businesses and investors, who have some $32 billion – possibly even more – of the almost $88 billion in deposits held in Cypriot banks? Or will it be Greek Cypriot businessmen who’ve kept their working capital in the banks?
One entity that expects to take a huge scalping is the Orthodox Church of Cyprus. Archbishop Chrysostomos II said Monday that he expected the church would lose more than $130 million in confiscated deposits.
Cypriots, who’ve already survived 10 days with minimal access to cash as banks remain closed for fear of a run, are hoping that their businesses can survive. The government has said banks will open Thursday, though how much money anyone will be allowed to withdraw is still uncertain.
Nicos Spinthakis, 37, proprietor of Karvounomagiremata, a restaurant that specializes in charcoal-grilled food on the Ledra Street pedestrian zone, said he was confident his business would survive, but “99 percent certain” the banks wouldn’t open as announced.
“I believe in my heart and in God that we’re going to find our way,” he said. “I work 16 hours a day. Everything I’ve saved is my earnings. When a businessman knows how to run his business, he has nothing to fear.”
He’s planning to lower prices by 15 to 20 percent and ask his staff to take 10 to 20 percent salary cuts.
Spinthakis has money in one of the big banks, but he’s under the 100,000-euro limit, so he’s not expecting to lose anything. But his suppliers now insist on being paid upfront in cash, and while he’s still taking credit cards, Visa hasn’t credited his account for the past three days.
“Soon,” he said, “I will have a cash flow problem.”