Cyprus: who pays the ultimate price?


Faced already with restrictions on cash withdrawals, workers in the Cypriot public and private sectors may not receive their salaries at the end of the month.

According to the country’s State General Accounting Office, the Central Bank is facing technical problems and might be unable to process payments.

This situation might in turn create a further liquidity shortage for citizens and is expected to create severe disruptions in the country’s commercial sector as well as the repayment of loans and payment of rents.

Meanwhile, banks in Cyprus have prepared to reopen on Thursday 28 March, after being shut since March 15, due to the country’s financial meltdown.

As a security precaution, hundreds of additional security personnel have been deployed to control crowds queuing to withdraw money.

Strict restrictions have been set on financial transactions once the banks open for six hours at noon.

According to capital movement restrictions imposed by the government and backed by the EU, the maximum cash withdrawal limit has been set at €300 per day and no checks will be cashed.

Money transfers outside Cyprus are prohibited, with a few very specific exceptions, and there is a limit of €5,000 a month in credit or debit card purchases while abroad.

Moreover, travelers leaving the country can only take up to €3,000, or the equivalent in foreign currency, with them in cash.

In addition, the transfer of money abroad will be severely limited, with Cypriot students overseas not being able to receive more than €10,000 per quarter.

While the exact extent of the haircut for the country’s two main banks has not been determined yet, depositors with more than €100,000 will see their deposits frozen for the foreseeable future and 40% of their funds converted into bank shares.

Those with less than €100,000 will not lose any funds - but face limits on what funds they can access.

The chief executive and board members of the Bank of Cyprus and Laiki Bank, the country’s two largest, were dismissed on Wednesday as part of the restructuring programme imposed the EU-IMF troika.

The decision was taken during a meeting between the troika team, finance ministry and Central Bank governor Panicos Demetriades.

The sackings follow the appointment of administrators to implement the decision to wind down Laiki and transfer its “good” assets to the Bank of Cyprus, along with a €9 billion of liabilities to the European Central Bank.

In a bid to placate the public, President Nikos Anastasiades launched a criminal investigation into the collapse of the banks, promising to hold accountable those responsible. But most Cypriots believe there will be no prosecutions.

Cyprus kept its banks closed as it negotiated a bailout with the troika that will involve Laiki being shut down and Bank of Cyprus being radically restructured.

The decision to keep banks closed for so many days left homes and businesses on the Mediterranean island scrambling for cash — and there were growing doubts about whether banks would even open their doors on Thursday, as promised.

Demetriades said the delay in reopening was to fully install capital controls to prevent depositors from draining their accounts and also to strengthen number one lender, the Bank of Cyprus. “A superhuman effort is being made for the banks to open on Thursday,” he said.

President Nicos Anastasiades secured the 10 billion euro ($13 billion) bailout in Brussels early on Monday, just hours before Cyprus faced bankruptcy and a possible exit from the euro.

The European Central Bank had threatened to “pull the plug” on liquidity on March 26, if there was no deal by then.

The new measures mean that Cyprus is the first Eurozone nation to impose capital controls - the absence of which is a fundamental reason behind the monetary union of the 17 members of the euro bloc - since the debt crisis began.

Concern about the ongoing situation in Cyprus has continued to weigh on the Athens stock market, with Greek shares ending down 4% on Wednesday.

Despite the fact that the Eurogroup agreement on March 25 prevented an immediate and disorderly bankruptcy, there is no doubt that the coming months are going to be dramatic for Cypriots.

Indeed, European Commission Vice President Olli Rehn even likened the situation faced by the Cyprus population to the Turkish invasion of 1974.

Hundreds of companies, universities, colleges, NGOs and government bodies have seen their cash reserves and current accounts obliterated as a result of the decision to impose massive haircuts to uninsured deposits.

Some of them will go bankrupt and, as a result, lay off, their staff.

These developments, in combination with the imposition of restrictions on the free movement of capital – also for an unspecified time period – raise serious doubts as to when the island economy will be able to function properly again.

Moreover, the unfortunate handling of the situation by the Eurogroup and the Cypriot government over the last few days has shaken the trust of Cypriot citizens in the country’s European trajectory, as recent polls have shown.

Equally fragile is the confidence of citizens and markets in the Eurozone’s crisis management skills.

In fact, the Eurogroup’s initial decision to impose a levy on deposits below 100,000 euros makes it clear that in case of a major crisis in the future, the Eurozone is ready to “cross the Rubicon.”

In an interview with the Financial Times, Eurogroup chief Jeroen Dijsselbloem went as far as to imply that the Cyprus model will be used as a template for the rest of the Eurozone and that depositors with more than 100,000 euros in their accounts may be requested to foot the bill for failed banks in the future.

Cyprus will pay a heavy toll for turning its economy into an offshore financial haven and allowing its banking sector to hyperinflate.

But if the purpose of the dramatic Eurozone all-nighters was not just to punish and make an example of the island, but to solve the issue, then we can hardly speak of a success.