The Cypriot economy remains in unprecedented limbo, as the country’s banks have remained closed since last Friday, March 15th, following a disastrous Eurozone decision to incur losses on retail deposits.
In Nicosia, hundreds of citizens queued outside the Laiki Bank’s ATM machines, where the maximum withdrawal was limited to €260 per day - amidst growing fears that a government backed “restructuring plan” will lead to the imminent closure of the country’s second biggest lender.
More importantly, normal bank transactions, like salary payments for workers, money transfers to young people studying abroad, company payments, etc., have been suspended, as fears for a run on the banks caused the closure of all internet banking and electronic services.
"There are rumours that Laiki Bank (the Greek name for the Popular Bank) will never open again. I want to take out as much as I can," Vassiliades, a local resident, told AFP news agency.
"I have nearly 60,000 euros savings in this bank and some credit unions. I don’t know if I will ever get it back now.”
"It’s all about cash now. Only a gambler will take cheques in this situation," said retired government official Phaedon Vassiliades as he withdrew money from the bank’s ATM at Nicosia’s Ledra Street tourist hotspot.
Last night, after an emergency Eurogroup teleconference to discuss the developments in Cyprus, the Eurozone’s finance ministers stated that they were willing to work with Nicosia on “a draft new proposal and that the EU would subsequently be prepared to continue negotiations on an adjustment programme”.
The ministers also reaffirmed in the Eurogroup statement “the importance of fully guaranteeing bank deposits below €100,000 in the European Union”.
Also yesterday, Cypriot political leaders held emergency talks for a “Plan B” in order to avoid the country’s financial meltdown, after the parliament overwhelmingly rejected a bailout plan that would have inflicted a ‘haircut’ on all bank accounts over 20,000 euros.
The alternatives
The country is now trying to find alternative ways to raise €5.8 billion that international lenders have demanded in return for a rescue package.
According to government officials, a “solidarity fund” will be created to bundle state assets as a basis for an emergency bond issue.
The new plan includes a smaller deposit grab to ease the pain on small savers, reforming the country’s crisis-hit banks and raising money from domestic sources including pension funds, gold reserves, and subsidiaries of foreign banks in Cyprus.
However, parliament speaker Yiannakis Omirou insisted a revised levy on larger bank deposits, many of them held by Russians, was not on the table.
Meanwhile, Cypriot Finance Minister Michalis Sarris’s efforts to secure Moscow’s support, after his Wednesday meeting with his Russian counterpart Anton Siluanov, came to a dead end, leaving the country with the danger of an imminent Eurozone exit on Monday, when the European Central Bank is threatening to “pull the plug” on emergency liquidity support from the ailing Cypriot banks.
Without ECB support, these banks will run out cash and Cyprus will be forced to print a new currency, in order to get its economy moving.
The situation started to unravel on Wednesday, when Cypriot lawmakers overwhelmingly voted against a controversial levy on bank deposits, proposed as a condition for a 10-billion-euro ($13 billion) loan by the European Union and the International Monetary Fund.
Cyprus speaker Yiannakis Omirou urged MPs to say “no to blackmail” as angry crowds also called for a “No” vote outside Parliament and held up signs warning that other financially crippled European nations like Italy and Spain could be next in line.
"There can only be one answer: no to blackmail” Omirou, of the socialist EDEK party told deputies who met in an emergency session.
"Our demand must be that this deal must be renegotiated. If we pass this tax there will be no foreign investor who will keep their money here” he warned.
Risking a depression
With Cyprus now in turmoil, the Eurozone is facing the prospect of losing one of its seventeen members, a scenario that would have potentially wide-ranging implications not just for the rest of Europe, but for the whole global economy.
But Northern European nations, including Germany, as well as the IMF, say that there is only so much they can do to help Cyprus.
The island’s banking sector is inflated by “Russian and Ukrainian illicit assets”, they claim, and needs to be wound down.
EU taxpayers and IMF members argue that they are only willing to pay for the liabilities of the Cypriot state and its people, not bail out foreign oligarchs.
On the other hand, the Cypriot authorities suggest that a violent ‘haircut’ on all foreign deposits will lead to a severe depression, since a large part of the country’s workforce is employed in the finance sector.
Cyprus has no significant agricultural or industrial production to support its standards of living.
The compromise reached between these two positions was the worst possible outcome.
In a dramatic 10-hour meeting of the Eurogroup last Friday, Eurozone finance ministers decided to inflict losses on retail deposits so as to keep a levy on large foreign deposits at a minimum.
The decision caused an outcry and an immediate run on the banks. As a result, banks have since stayed closed.
The future of Cyprus will now have to be decided by Monday, ironically when Greek-Cypriots celebrate the uprising of Greeks against the Ottoman Empire in 1821.
