News / Europe

Banks in Cyprus Remain Closed After Bailout

Cyprus Banks Remain Closedi
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March 26, 2013 9:06 PM
People with more than $130,000 deposited in Cypriot banks could see about 40 percent of their deposits turned into bank shares, the country’s finance minister has warned. The news comes after Cyprus struck a deal with the European Union and the International Monetary Fund in which the island nation will get $13 billion in aid. But to earn it, Cyprus has to overhaul its banking sector. As Selah Hennessy reports from London, analysts say the result could be crippling.
Selah Hennessy
Depositors with more than $130,000 in Cypriot banks could see about 40 percent of their deposits turned into bank shares, the country's finance minister has warned. The news comes after Cyprus struck a deal with the European Union and the International Monetary Fund in which the small Island nation will get $13 billion in aid. To earn that money, though, Cyprus has to overhaul its banking sector and analysts say the result could be crippling.

Banks in Cyprus closed their doors on March 15, and they have not yet re-opened. The trickling cash flow already has taken its toll on the economy.

Small businesses say they are doing very little trade, and some say they already have had to lay off employees.

The worst likely is still to come, though, because the deal struck with international lenders aims to shrink the Cypriot banking sector, which is about eight times the size of the economy.

The country's biggest lender, the Bank of Cyprus, will be radically restructured and Laiki Bank, the second largest, is set to close. The bank employs 8,000 people - a massive blow for a small country with a population of less than 1 million.

Cyprus Central Bank Governor Panicos Demetriades (L) and Cypriot Finance Minister Michael Sarris listens to reporters' questions during a news conference in the building of the Central Bank of Cyprus, in Nicosia, March 26, 2013.Cyprus Central Bank Governor Panicos Demetriades (L) and Cypriot Finance Minister Michael Sarris listens to reporters' questions during a news conference in the building of the Central Bank of Cyprus, in Nicosia, March 26, 2013.
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Cyprus Central Bank Governor Panicos Demetriades (L) and Cypriot Finance Minister Michael Sarris listens to reporters' questions during a news conference in the building of the Central Bank of Cyprus, in Nicosia, March 26, 2013.
Cyprus Central Bank Governor Panicos Demetriades (L) and Cypriot Finance Minister Michael Sarris listens to reporters' questions during a news conference in the building of the Central Bank of Cyprus, in Nicosia, March 26, 2013.
James Ker-Lindsay, Cyprus expert at the London School of Economics, said the whole economy will be affected.

"This deal has the potential to be completely devastating for Cyprus. The banks are a major part of the Cyprus economy," said Ker-Lindsay. "There is going to be a lot of businesses which will have lost money in all of this. This will trickle down through the economy. It will be absolutely enormous, the effects of this."

This EU/IMF deal differs from other euro zone bailouts because, instead of taxpayers footing the bill, depositors with large balances are bearing the costs. Cyprus academic Vassilis Monastiriotis said it is a major shift in euro zone policy.

"We had the most similar case of Ireland. We had the decision to push the bill to the taxpayer so the government, the Irish government took the responsibility of recapitalizing the banks, the deposits were guaranteed, and then this spilled over to the real economy," said Monastiriotis. "The case of Cyprus is exactly the opposite. It is the bond holders, the shareholders, and the depositors that take up the bill, and then we try to minimize the implications to the government."

On Monday the head of the Eurogroup, Jeroen Dijsselbloem, suggested the rescue program for Cyprus could be a new template for resolving the banking crisis in Europe. He said, "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute to recapitalizing the bank, and if necessary, the uninsured deposit holders."

Related video report by Mil Arcega
Cyprus Crisis Agreement Could Lead to Credit Crunch, High Unemploymenti
X
March 26, 2013 11:47 PM
Financial uncertainty for the island nation of Cyprus is far from over. Despite narrowly averting bankruptcy and securing a 13-billion-dollar bailout, economic pain may be just beginning. Economists say the country will pay a price in higher unemployment, bankruptcies and a credit crunch as it struggles to right its troubled banks. Mil Arcega reports.
Following his comments, financial markets dropped. Monastiriosis said it would be a dangerous precedent to set.

"There is a big risk of destabilizing the banking system of the euro zone with this kind of solution because the savings above 100,000 euros are not guaranteed anywhere in the euro zone. This may lead to very significant outflows of capital from the euro zone - definitely from the south of the euro zone to the north. But also potentially outside of the euro zone, and this will create more problems then it solves," said Monastiriosis.

For now, though, it is the Cypriots who have to cope with the immediate impact of their banking situation.

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by: NVO from: Cyprus
March 26, 2013 2:31 PM
Yesterday, reported on something very disturbing (at least to Cyprus’ citizens): despite the closed banks (which will mostly reopen tomorrow, while the two biggest soon to be liquidatedbanks Laiki and BoC will be shuttered until Thursday) and the capital controls, the local financial system has been leaking cash. Lots and lots of cash.

Alas, we did not have much granularity or details on who or where these illegal transfers were conducted with. Today, courtesy of a follow up by Reuters, we do.

The result, at least for Europe, is quite scary because let’s recall that the primary political purpose of destroying the Cyprus financial system was simply to punish and humiliate Russian billionaire oligarchs who held tens of billions in “unsecured” deposits with the island nation’s two biggest banks.

As it turns out, these same oligrachs may have used the one week hiatus period of total chaos in the banking system to transfer the bulk of the cash they had deposited with one of the two main Cypriot banks, in the process making the whole punitive point of collapsing the Cyprus financial system entirely moot.

by: IDUEHE from: Enugu
March 26, 2013 10:53 AM
Why such threat to the banking system, it is keeping down the growth of business as customers who are banking with them will experience stillness in their businesses. University of Nigeria http://www.unn.edu.ng defines it as inhumanity in business

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