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.
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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.”
The confluence of events might force many small enterprises out of business, a respected economist here said. With banks taking enormous amounts out of the accounts of their depositors, “you will have no banking system. Credit will collapse. You could have a heart attack in the system,” Greek-born economist Yiannis Mouzakis said.
Cyprus’ deep recession can only worsen, he said. Small businesses may have to close as they run out of cash and the owners have to put in their own savings, he said. Otherwise, “you will have the destruction of wealth,” he said.
At Electroline, an appliance store, customers stopped coming once the banks closed, said the manager, Christos Christou, 30, who said he didn’t know when or whether his own salary would be paid.
The neatly organized shop, part of a chain of seven, is on Makarios Street, which was once a thriving venue for Cypriot businesses but now is a desolate street where every other shop stands empty.
At the main Esso gas station on Makarios Street, all sales are in cash. That’s because “we pay our suppliers in cash,” said manager Panagotis Zanids, 48. For the past three years, sales have dropped 10 to 15 percent annually. If that continues, and there’s every expectation that it will, “I will have to close,” he said.
Cyprus’ financial crisis was long expected, ever since Greece was forced to write down the value of its government bonds. At the end of 2011, the Bank of Cyprus had $14 billion tied up in Greek debt, while Laiki Bank had more than $24 billion, Reuters reported, quoting official EU statistics.
The banks invested in Greek bonds at a 25 percent discount, on the assumption that there’d be a further rescue and they’d be redeemed at face value. Instead, private-sector investors purchased the debt at a 50 percent discount, causing major losses for the two banks.
Nearly everyone has fumbled in this crisis, which came to a head shortly after the new Cypriot president, Nicos Anastasiades, a moderate, had taken office, replacing Demetris Christofias, a communist who’d refused to resolve the debt crisis on terms demanded by the EU.
Ten days ago, Anastasiades reached agreement with the IMF, the European Central Bank and the European Commission to levy a 9.9 percent tax on accounts over 100,000 euros, and some 6.75 percent on accounts below that amount. But the Greek Cypriot Parliament rejected the proposal, almost unanimously, and Anastasiades instead negotiated the arrangement that ensures all the costs will fall on bigger depositors.
The negotiation ended in the early hours of Monday, and on returning here Monday evening, Anastasiades announced that all Cypriot banks except the two that are in deepest trouble would open Tuesday. About an hour later it was announced that none of them would reopen yet.
The EU hasn’t done much better in explaining what the deal would mean. Jeroen Dijsselbloem, the Dutch chairman of the 17 eurozone finance ministers, spoke of the deal triumphantly Monday, citing Cyprus as a model for reducing public exposure when banks fail. But the idea that the Cyprus model – confiscating money from account holders – would be applied elsewhere sent markets tumbling.
A few hours later, Dijsselbloem called Cyprus “a specific case with exceptional challenges,” to make certain that no one thought he was advocating general acceptance of the measure.
About the only major figure in Cyprus who came out in higher standing than when the crisis began is Archbishop Chrysostomos, who in an interview offered to put all the church’s wealth at the disposal of the nation – and urged the Cypriot government to abandon the euro as its currency.
Chrysostomos said the church in the past had had to sell candles and precious religious objects, “and yet it survived.”
The church, he said, “will stand close to the people, as the people stand close to the church.”