Cyprus Sets Up Tight Controls as Banks Prepare to Reopen
Published: March 27, 2013
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Demonstrations that first attracted hundreds here last week have swelled into gatherings of thousands of people who have grown more agitated as the realization dawns that their future under the terms of the bailout will be bleak.
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Thousands of employees will lose their jobs at Laiki Bank, the country’s second-largest bank, which is being wound down. And the freezing of accounts at all banks since March 16 means businesses have not been able to pay their employees. Importers have also not been able to pay their bills, raising concerns about shortages of basic goods on an island that imports almost everything it consumes.
At the same time, the governing class is attempting to shift the blame for the debacle.
Mr. Anastasiades has started making incendiary statements about the central bank president, Panicos O. Demetriades, hinting strongly that he wants to see Mr. Demetriades ousted. That, in turn, has raised concerns about the central bank’s independence.
“The knives are out,” said a person with knowledge of the situation, who requested anonymity because he was not authorized to speak publicly.
The cost of bailing out the island’s two largest banks, Bank of Cyprus and Laiki, is to be borne by the banks’ large, uninsured depositors.
At a news conference on Tuesday, Mr. Demetriades, the central bank governor, said he expected big depositors at Bank of Cyprus to sustain a “haircut,” or loss, of about 40 percent on their 14 billion euros in long-term deposits. In exchange, depositors will receive shares in a recapitalized bank.
But with many economists now estimating that the Cypriot economy will contract 5 percent to 10 percent this year, major depositors may have to take an even bigger loss so that the Bank of Cyprus can free up cash to protect its rapidly deteriorating loan book.
Laiki, also known as Cyprus Popular Bank, is even worse off. About 4 billion euros in deposits there will be transferred to a so-called bad bank, and those assets will most likely be wiped out as the bank is wound down.
That move was ordered by the Cypriot central bank, carrying out the troika’s demands. In addition, the central bank has in effect taken charge of the Bank of Cyprus, a private-sector institution. In protest, the chairman, Andreas Artemis, tendered his resignation Tuesday — a move rejected by the bank’s board.
But on Wednesday the central bank chief, Mr. Demetriades, forced out Mr. Artemis and the entire board of Bank of Cyprus as part of the legal process required for that bank to be consolidated. Also ousted was the chief executive of the bank, Yiannis Kypri.
Under E.U. treaties, restricting the free movement of capital is forbidden. Critics say that what is happening in Cyprus shows that E.U. rules will be flouted when the International Monetary Fund, the E.C.B. and E.U. leaders find it convenient to do so.
By imposing capital controls, European and Cypriot officials have effectively created two classes of euro: cash that can be freely spent, and cash that is locked up by capital controls and as a result is worth far less.
“It has to be acknowledged that this is something entirely new,” said Nicolas Véron, a senior fellow at Bruegel, a research group in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington.
“The question is, ‘Can the euro zone survive capital controls?”‘ Mr. Véron asked. “This will shape expectations in other countries, and the issue is whether capital controls can be avoided in future episodes.”NEW YORK TIMES
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