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Big depositors in Cyprus to lose far more than feared

Big depositors in Cyprus’s largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday.

UNDER conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back.

The toughening of the terms will send a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.

Officials had previously spoken of a loss to big depositors of 30 to 40 percent.

Cypriot President Nicos Anastasiades on Friday defended the 10-billion euro ($13 billion) bailout deal agreed with the EU five days ago, saying it had contained the risk of national bankruptcy.

“We have no intention of leaving the euro,” the conservative leader told a conference of civil servants in the capital, Nicosia.

“In no way will we experiment with the future of our country,” he said.

Cypriots, however, are angry at the price attached to the rescue – the winding down of the island’s second-largest bank, Cyprus Popular Bank, also known as Laiki, and an unprecedented raid on deposits over 100,000 euros.

Under the terms of the deal, the assets of Laiki bank will be transferred to Bank of Cyprus.

At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest, the source said. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.

Those with deposits under 100,000 euros will continue to be protected under the state’s deposit guarantee.

Cyprus’s difficulties have sent jitters around the fragile single European currency zone, and led to the imposition of capital controls in Cyprus to prevent a run on banks by worried Cypriots and wealthy foreign depositors.

Cyprus Euro

Banks reopened on Thursday after an almost two-week shutdown as Cyprus negotiated the rescue package. In the end, the reopening was largely quiet, with Cypriots queuing calmly for the 300 euros they were permitted to withdraw daily.

The imposition of capital controls has led economists to warn that a second-class “Cyprus euro” could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.

Anastasiades said the restrictions on transactions – unprecedented in the currency bloc since euro coins and banknotes entered circulation in 2002 – would be gradually lifted. He gave no time frame but the central bank said the measures would be reviewed daily.

He hit out at banking authorities in Cyprus and Europe for pouring money into the crippled Laiki.

“How serious were those authorities that permitted the financing of a bankrupt bank to the highest possible amount?” Anastasiades said.

The president, barely a month in the job and wrestling with Cyprus’s worst crisis since a 1974 war split the island in two, accused the 17-nation euro currency bloc of making “unprecedented demands that forced Cyprus to become an experiment”.

European leaders have insisted the raid on big bank deposits in Cyprus is a one-off in their handling of a debt crisis that refuses to be contained.

Model

But policymakers are divided, and the waters were muddied a day after the deal was inked when the Dutch chair of the euro zone’s finance ministers, Jeroen Dijsselbloem, said it could serve as a model for future crises.

Faced with a market backlash, Dijsselbloem rowed back. But on Friday, European Central Bank Governing Council member Klaas Knot, a fellow Dutchman, said there was “little wrong” with his assessment.

“The content of his remarks comes down to an approach which has been on the table for a longer time in Europe,” Knot was quoted as saying by Dutch daily Het Financieele Dagblad. “This approach will be part of the European liquidation policy.”

The Cyprus rescue differs from those in other euro zone countries because bank depositors have had to take losses, although an initial plan to hit small deposits as well as big ones was abandoned and accounts under 100,000 euros were spared.

Warnings of a stampede at Cypriot banks when they reopened on Thursday proved unfounded.

For almost two weeks, Cypriots were on a ration of limited withdrawals from bank cash machines. Even with banks now open, they face a regime of strict restrictions designed to halt a flight of capital from the island.

Some economists say those restrictions will be difficult to lift. Anastasiades said the capital controls would be “gradually eased until we can return to normal”.

The government initially said the controls would stay in place for seven days, but Foreign Minister Ioannis Kasoulides said on Thursday they could last “about a month”.

On Friday, easing a ban on cheque payments, Cypriot authorities said cheques could be used to make payments to government agencies up to a limit of 5,000 euros. Anything more than 5,000 euros would require Central Bank approval.

The bank also issued a directive limiting the cash that can be taken to areas of the island beyond the “control of the Cypriot authorities” – a reference to Turkish-controlled northern Cyprus which considers itself an independent state. Cyprus residents can take 300 euros; non-residents can take 500.

Under the terms of the capital controls, Cypriots and foreigners are allowed to take up to 1,000 euros in cash when they leave the island.

(Reuters – Additional reporting by Ivana Sekularac and Gilbert Kreijger in Amsterdam; Writing by Matt Robinson; Editing by Giles Elgood)

Further reading

Full text of draft decree on Bank of Cyprus haircut (Greek)

Readers' comments

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  • Martyn says:

    Christine Lagarde, I read, says the bail-out deal ‘puts Cyprus on a sustainable path to recovery.’ Extremely unlikely say many others, including me. The Telegraph writer, Jeremy Warner, reckons ‘no economic banking system can survive such a restructuring’. I agree with Warner, totally disagree with Ms Largarde.

    The Guardian tells us bluntly, and probably correctly, “Cyprus had a flawed economy – but now has no economic model at all.” The new Cyprus President assures us that the deal agreed, whilst not good, is the best Cyprus can get and really we should and will knuckle down and start paving a path to future prosperity. Hmmm…..

    I agree with The Voice, the deal struck makes the challenge FAR too big, there are far too many pre-Bail-Out matters still festering, property values will plummet, GDP will likely fall by at least 10%’, GDP will fall substantially by about 10%, unemployment may rocket as high as 25%..

    The Eurozone economies are sandbanked, there are at least 8 other members in trouble or looking like hitting serious problems , so no solace whatever there.

    UBoat has in my view accurately presents the ‘desperados only’ Exit alternative, short of sanctions busting and law-breaking no-one in their ‘right mind’ is going to be able to leave – with increasing bad publicity Europe-wide re the property/banking/legal situations on the island, the still massive backlog in issuing Title Deeds, who can see any renewed impetus in the once-buoyant holiday and investment property markets.

    – the Euro lock-in means the country has little or no Competitive Advantage any more in the Tourism markets, the remaining providers still think they can hang on to decent margins, despite far better organised and better priced offerings elsewhere. The Russians will rapidly lose interest, soon there won’t be many €300k+ properties for qualifying Chinese buyers to buy.

    Next will doubtless come further tax rises, discouraging even the bravest to come in to Sunny Cyprus.

    Yes maybe we will only have the Sun, the Sea, the Scenery to brighten our days over the next few years. Together with the earnest hope that MedGas can be well tapped, managed and marketed and play a major role in the projected medium-longer term recovery of this lovely Island State.

  • @stuart – there are no problems with direct debits. I’m with the Laiki and pay my electricity and telephone bills using direct debits.

    Throughout the past two weeks I have been filling the car with petrol, shopping at various supermarkets and shops using my Laiki Debit Card – no problems at all.

    There’s been a lot of sensationalist rubbish printed in the UK gutter press that you should ignore.

    (When the banks re-opened on Thursday there were more reporters waiting outside the banks than customers waiting to get in).

    Update – I’ve just logged into my Laiki account – 19:10 local time. It said this about standing orders:

    Execution of Standing Orders/Direct Debits

    We would like to inform you that all your bill payments through direct debits will be executed as soon as possible. All your Standing Orders will also be executed, provided that the beneficiary holds an account within the bank.

  • stuart says:

    As the banks have been closed for nearly 2 weeks, can you tell me. What happens with the direct debits going out each month. Has this still being paid or has the authorities etc cancelled our direct debits, and made us pay more?

  • Uboat says:

    Well Happy Easter one and all.

    Having kept up to date with all the reports on Cyprus lately I begin to wonder how this will effect the future of the Island. Like most of us who read the posts on this site I wanted a vested interest well into my retirement and beyond.

    The title deed situation was slowly pushing me to think that selling was best. But Now think about it none of us with any sense can sell, title deeds or not.

    If we manage to sell then any money above 100000 will get taken as per the recent decree. So there is the first reason NOT to sell. if you are OK with that then any money you have, will not be able to leave the Island. Reason 2 not to sell. Total instability with any large sum of money in any bank on the island, reason 3 not to sell. I know this situation may get better but it may also get worse. Not to mention the Cypriot logic on price increase as they did not make enough last year lets put prices up to compensate. Slowly they will kill the tourist trade as well. I had a look at Holidays in hotels, Well No discounts offered that I could see. just as expensive same with flights. They need to get people in to Cyprus with as much cash as possible as quickly as possible.

    This will in turn slow the property market or even stop it altogether. who wants to sell as your money is taken who wants to invest as No title deeds and no real incentive. Looks like All of us with a vested interest here need to think carefully batten down the hatches and make some contingency plans.

    Bloody shame Cyprus was such a good place to visit and live.

    Hope I’ve cheered you up?

    UBoat

  • Alan Waring says:

    @Mike. Well said. I would suggest that the investigatory body that you recommend would come under the title of Independent Commission Against Corruption (ICAC). Polis Polyviou who headed the official Mari Inquiry specifically recommended the establishment of an ICAC in his report (and he is tipped to be the next AG).

    All the public statements so far from the new President are in line with an anti-corruption drive: real meritocracy in the public services; specific exclusion of political affiliations and personal connections as recruitment and selection criteria; individual committment to honesty, integrity and transparency.

    I have been calling (in the media and elsewhere) for a Cyprus ICAC since 2007. Looks like we might get one soon. It’s a start and will need to be on-going (as the original ICAC in Hong Kong has had to be).

  • @Mike – Thanks for your comment

    I spent some time in Hong Kong in the 1970s shortly after the Independent Commission Against Corruption (ICAC) was established in 1974, which was tasked with cleaning up the endemic corruption in the many departments of the Hong Kong Government. (I was working for the Hong Kong Government and the Treasury at the time).

    Over the years, the ICAC has transformed Hong Kong into one of the ‘cleanest’ places in the world.

    If something similar to the ICAC were to be set up in Cyprus, who could be trusted to run it?

    The International Monetary Fund estimates that between 2% and 5% of world GDP is linked to black market activity and as you say much larger ‘laundering’ activities take place in the UK and the USA. For example HSBC paid $1.2 billion to the US in an out of court settlement recently over a money laundering scandal – and there have been other revelations about the way major financial institutions in the UK and elsewhere are said to have rigged LIBOR rates.

    In the UK and the USA, money laundering claims are investigated. But in Cyprus, although they have all the necessary laws in place, it would appear that the authorities are either unwilling or unable to investigate complaints (watch the video Browder warned Germans of Russian-Cyprus money laundering) – and I guess this is what may have enraged the Eurogroup into acting the way it did.

    And I don’t think the statements made by the former Finance Minister, Charilaos Stavrakis, will have helped – see Corruption in Cyprus at all levels says former minister.

  • Mike says:

    I am a Cypriot of Greek ethnicity. I fear for the Island, as I fear there is an ulterior agenda being played out here. I also worry that the population at large, with the exception of small groups with vested financial interests, generally takes very little interest in the politics of the Island which directly affects their every day lives and future. This apathy is a perfect environment in which to enable and encourage “artful ways” in effect encouraging unethical activity and immoral practices.

    Sadly however the press and media are adept in convincing the population that successive administrations are professional, clean, legal and above board and that any inference to the contrary is a malicious accusation from quarters with an agenda or score to settle. There is some truth in this, on limited occasions, but generally if the people are fed, watered, housed and kept in the style they very easily become accustomed to then those in power and influence know that they will generally tow the line and not ask too many awkward questions. This leads to the the revelations that periodically arise as rumours but are soon forgotten.

    I believe that until a totally independent body with a wide remit is set up to investigate claims of maladministration or fraud in any governmental department or company then there will always be those who will seek opportunities to further their own or relatives interests before those of the Country and the people. The EU bailout and conditions attached are just the beginning of a lot of pain for many, however some of those who will suffer are deserving but a large majority are not.

    The Russian influx has been permitted to escalate beyond any reasonable sense and I do not believe all funds deposited in Cyprus Banks is legitimate, contrary to denials; it may be legal but not legitimate. We must not lose sight of the fact however that far larger laundering (if we wish to call it that) acts take place in UK, USA, France and many other Countries, generally in the form of property purchase, offshore banking, super yachts, football clubs and complex webs of global companies. Nice work if you can get it and all facilitated by apathy in my humble opinion.

  • TheVoice says:

    Dear Mr. Anastasiades,

    If you think you have averted the bankruptcy of Cyprus you are sadly deluding yourself. All that has happened is that you now owe far more money than you can afford to service. Your GDP is about to crumble as your biggest industry (something like 80% of your country’s GDP) has been wiped out, so please explain to me how you intend to service your loans?

    In my opinion, Sir, you would do better to default now and leave the euro. Yes it will be painful for your country, but do it now while it is your choice and you can explain to your voters why you are taking this drastic action, and not when you are forced into it.

    Thanks for listening.

  • @Martyn – while we’re on the subject of pouring money into banks, the following video is ‘interesting’

  • Martyn says:

    So, it just gets worse:

    1. much worse for those who ignored the €100,000 ‘guaranteed’ deposit limit. They took Risks, whether they knew it or not. But yes, the ‘devil in the detail’ means they have to hope that some day, their BoC shares might become worth something, and also reconcile themselves with the possibility they may ‘never be paid back’. Definitely spells the end of Cyprus as a Financial Centre.

    2.(The President) hit out at banking authorities in Cyprus and Europe for pouring money into the crippled Laiki. “How serious were those authorities that permitted the financing of a bankrupt bank to the highest possible amount?” Anastasiades said.

    Very good Question! Quite a lot of us pulled out of Laiki when it suddenly changed its name to ‘Popular’, a sure sign that ‘trouble was brewing’ and allowing several of us to speculate that the words Not Very should proceed Popular!

    3. My view is all this really signals the Beginning of the End for the Euro as we have come to know it. The EZ Finance wizards have already admitted all this was an ‘experiment’ with a very small player, and that what happened to Cyp WILL be one to Template for future Bail-Outs. So precedent set, strong signals going out and as clear an indication as you are likely to get that ther WILL be future bailouts.

    A 2-tier Euro is perhaps the Best Cyprus can now hope for, Cyp being in a heavily devalued Euro 2

    All this has MUCH further to go, the genie is out of the bottle now re the ill- fated, not-thought-through Euro ‘project’!

  • The views expressed in readers' comments are not necessarily shared by the Cyprus Property News.

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