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With or Without Bailout, Cypriots Lose Trust in Banks With or Without Bailout, Cypriots Lose Trust in Banks
(35 minutes later)
NICOSIA — With her wedding day three months away, Despina Charalambous is desperate to have access to her savings, which have been frozen at the Bank of Cyprus for more than a week. She plans to take out all her money once the banks reopen, even though the new bailout plan for her country supposedly guarantees the safety of her deposits. NICOSIA, Cyprus — With her wedding day three months away, Despina Charalambous is desperate to gain access to her savings, which have been frozen at the Bank of Cyprus for more than a week. She plans to take out all her money once the banks reopen, even though the new bailout plan for her country supposedly guarantees the safety of her deposits.
“I have lost my trust in Bank of Cyprus and banks in general,” Ms. Charalambous, 33, a biologist, said, still bitter that just last week the country’s president was ready to skim money even from small savers like her to help secure a €10 billion, or $12.9 billion, lifeline to the nation’s banking industry. “I have lost my trust in Bank of Cyprus and banks in general,” Ms. Charalambous, 33, a biologist, said. She was still bitter that just last week the country’s president was ready to skim money even from small savers like her to help secure a 10 billion euro, or $12.9 billion, lifeline to the nation’s outsize banking industry.
Multiply Ms. Charalambous’s concerns by tens of thousands of account holders in Cyprus, and it becomes apparent why average people, business customers and many experts, have a sneaking suspicion: that European leaders, by scrambling to cobble together a solution to the Cyprus crisis, have come up with little more than a Band-Aid for what is likely to become a growing wound. Multiply Ms. Charalambous’s concerns by tens of thousands of account holders in Cyprus, and it becomes apparent why many people here and abroad have a sneaking suspicion that European leaders, in scrambling to cobble together yet another solution on Sunday night to the Cyprus crisis, have come up with little more than a Band-Aid for what is likely to remain a gnawing wound.
Based on the reaction of markets and many analysts and economists on Monday, there is little widespread confidence that the measures hammered out Sunday night in Brussels will go nearly far enough to right all that is wrong with Cyrpus’s banks. Stocks were down broadly in Europe, and the borrowing costs of financially shaky Spain and Italy spiked upward as the markets digested the Cyprus news — and the broader implications for the euro currency union. Stocks were down broadly in Europe on Monday, after the head of the Eurogroup, Jeroen Dijsselbloem, suggested that the idea of skimming savers’ accounts to bail out banks could be considered a “template” for other countries. The borrowing costs of the financially shaky Spain and Italy surged upward as the markets digested the Cyprus news — and the broader implications for the euro currency union.
While depositors with less than €100,000 in their accounts will be untouched, people with more money will take losses, in a first for euro zone bailouts. So will senior bondholders in some of the banks, who have hitherto been untouchable in such bailouts. While depositors with less than 100,000 euros in their accounts will be untouched, people with more money will take losses in a first for euro zone bailouts. More broadly, this is the first time a euro zone country is planning to block depositors from taking their money out of financial institutions in large amounts and moving it elsewhere.
And breaking additional new ground, a euro zone country is taking steps to prevent people from taking their money out of financial institutions on a large scale. The measures, known as capital controls, have typically been used only in emerging countries, like Argentina. Now Cyprus, a longtime money haven, is struggling to figure out how to prevent it from fleeing. In recent decades, such measures, known as capital controls, have typically been confined to emerging countries, like Argentina, or authoritarian states like Iran. Now Cyprus, a longtime haven for rich people from around the world, is struggling to figure out how to prevent them from going elsewhere.
“This is just the beginning,” said Nicolas Véron, a senior fellow at Bruegel, a policy research group in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington. “For the first time, we have capital controls in the euro zone,” said Nicolas Véron, a senior fellow at Bruegel, a policy research group in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington. “The next time there is a crisis somewhere else in the world, people will think of what happened in Cyprus and will try to get their money out much faster. These are the new rules of the game.”
“For the first time, we have capital controls in the euro zone. We’ve just spent the last three years saying we can’t have that,” he said. “The next time there is a crisis somewhere else in the world, people will think of what happened in Cyprus and will try to get their money out much faster. Even many ordinary savers like Ms. Charalambous will have to wait a little longer for their cash. Despite promises since last week that the country’s banks would reopen on Tuesday, the government late on Monday ordered the Bank of Cyprus and Laiki Bank — the nation’s largest financial institutions, with most of the accounts on the island — to stay shut through at least Thursday. And automated cash withdrawals will be limited to 100 euros a day.
“These are the new rules of the game.” Under the terms of the bailout, Laiki will be restructured, with its guaranteed deposits transferred to the Bank of Cyprus.
But Ms. Charalambous will have to wait a bit longer for her cash. Despite promises since last week that the country’s banks would reopen on Tuesday, the government late Monday ordered Bank of Cyprus and Laiki Bank — the nation’s largest financial institutions, with most of the accounts on the island — to stay shut through at least Thursday. And their automated cash withdrawals will be limited to €100 a day. While smaller banks were supposed to reopen on Tuesday, the government announced just before midnight that they, too, would remain closed for a few more days. Local bankers conceded that the country was ill-prepared to deal with carrying out capital controls. It had not, for example, determined what types of controls to put in place — whether restricting local transfers, or forcibly extending the maturity of term deposits, or even in extreme cases closing bank accounts.
Under the terms of the bailout, Laiki will be restructured, with its guaranteed deposits to be transferred to Bank of Cyprus. Bankers and lawyers still working on the bailout deal on Monday said a decision had not been reached on whether Cypriots with deposits under 100,000 euros would be able to walk into their local branches and transfer their deposits to another, safer bank on the island.
Local bankers conceded that the country was ill prepared to deal with implementing capital controls. It had not, for example, determined what types of controls to put in place — whether restricting local transfers, or forcibly extending the maturity of term deposits, or even in extreme cases closing bank accounts. “They definitely will not be able send their money overseas,” said a person involved in the discussions who spoke anonymously because the person was not authorized to speak publicly. “But with regard to transferring them to another local bank, that has not been decided.”
Bankers and lawyers still working on the bailout deal Monday said that a decision had not yet been reached as to whether Cypriots with deposits under €100,000 will be able to walk into their local branches and transfer their deposits to another, safer bank on the island. No wonder Ms. Charalambous is edgy. “You just get the sense that they don’t know what they are doing,” she said.
“They definitely will not be able send their money overseas,” said a person involved in the discussions who was not authorized to speak publicly. “But with regard to transferring them to another local bank, that has not been decided.” Banking experts say trust, once lost, is not easily regained. In the case of Cyprus, the deep desire by Germany and the International Monetary Fund to make those who took advantage of the system pay a share of Europe’s latest bailout may have long-term consequences not just for Cyprus but across the euro area.
No wonder Ms. Charalambous is edgy. “You just get the sense that they don’t know what they are doing,” she said. “It makes me feel that I should definitely take my money out.” “Burden sharing is fine,” said Adrian Blundell-Wignall, the top financial economist at the Organization for Economic Cooperation and Development and a member of the Financial Stability Board. “But if you make people nervous about their deposits, you are playing with fire.”
To a large degree, Europe is betting that people like Ms. Charalambous will, in effect, give policy makers a second chance by not heading for the exits when banks reopen. While analysts hailed Europe’s decision to wind up Laiki Bank by transferring its poorly performing assets to a so-called bad bank and the better-performing ones to the Bank of Cyprus, it was far from clear how Cypriots would regard their largest bank when it did reopen its doors.
But banking experts say that trust, once lost, is not so easily regained. In the case of Cyprus, the deep desire by Germany and the International Monetary Fund to make the private sector pay its share of Europe’s latest bailout may have long-term consequences not just for Cyprus, but across the euro area. The Bank of Cyprus reflected the ambition of this small island — like Iceland before it — to become a global financial player by attracting deposits from all over the world.
“If you don’t heed the lessons of hundreds of years of banking crises, the burden you share will be all the greater,” said Adrian Blundell-Wignall, the top financial economist at the Organization for Economic Cooperation and Development and a member of the influential talking shop of central bankers called the Financial Stability Board. But at its root, wealthy Russians and other foreigners aside, this century-old institution is a local one — handling the short-term deposits, credit cards and working capital needs of Cyprus’s 850,000 citizens with branches on practically every street corner in Nicosia and even in the most remote fishing village. If the concerns voiced by Ms. Charalambous and many other Cypriots over the last 10 days are an indication, the bond of trust between the bank and its clients may already be irreparably damaged.
“Burden sharing is fine,” he said, “but if you make people nervous about their deposits, you are playing with fire.” The uncertainty has also wreaked havoc with thousands of businesses of all sizes that had kept large accounts at the Bank of Cyprus and Laiki Bank.
While analysts hailed Europe’s decision to wind up Laiki Bank by transferring its poor-performing assets into a bad bank and the better-performing ones to Bank of Cyprus, it was far from clear how Cypriots would regard their largest bank when it does reopen its doors. “We’re talking about the two biggest banks that supply the financing in this country,” said Vasilis Zertalis, chief executive of Prospectacy, a financial services consulting firm that helps companies set up shop in Cyprus. With the banks’ prolonged closure, Mr. Zertalis said, “many of those companies are going to go out of business right away.”
In many ways, Bank of Cyprus is for this country Citigroup, JPMorgan Chase and Bank of America all rolled into one — an institution with branches on the busiest of street corners and in the smallest of fishing villages, which has also symbolized the small island’s ambition to become a global financial player by attracting deposits from all over the world. Since last weekend, when President Nicos Anastasiades first floated the idea of confiscating a portion of bank deposits, Mr. Zertalis’s phone has been ringing nonstop with clients looking for a way out. “We’re just trying to keep our clients operational,” he said.
But at its root, wealthy Russians and other foreigners aside, this century-old institution is a local one — handling the short-term deposits, credit cards and the working capital needs of Cyprus’s 850,000 citizens. If the concerns voiced by Ms. Charalambous and countless other Cypriots over the past 10 days are an indication, the bond of trust between the bank and its clients may already be irreparably damaged. On Monday, he was frantically searching for a solution for one of his clients with a half-million-euro overdraft at Laiki — which, like the Bank of Cyprus and other financial institutions here, took large losses on its holdings of Greek debt and lost piles of money lending to businesses, now bankrupt, in Greece.
The uncertainty has also wreaked havoc with thousands of businesses of all sizes that had kept large accounts at Bank of Cyprus and Laiki Bank. The client, a midsize electronics retailer that imports PlayStations, Xboxes and video games, must pay its suppliers by the end of the month — this Friday — for products it already imported to Cyprus. But the importer will not be able to collect payments from customers until the end of April. Mr. Zertalis has sought financing from abroad, and he has been working to get an extension from his client’s suppliers.
“We’re talking about the two biggest banks that supply the financing in this country,” said Vasilis Zertalis, the chief executive of Prospectacy, a financial services consulting firm that helps companies set up shop in Cyprus.
Many of the businesses depend on bank overdrafts to maintain the volume of their transactions and to meet payroll. With the banks’ prolonged closure, Mr. Zertalis said, “many of those companies are going to go out of business right away.”
Since a week ago Saturday, when President Anastasiadis first floated the idea of confiscating a portion of bank deposits to help meet the requirements Cyprus’s international lenders had set for the bailout, Mr. Zertalis’s phone has been ringing non-stop with clients looking for a way out. “We’re just trying to keep our clients operational,” he said.
On Monday, he was frantically searching for a solution for one of his clients with a half-million-euro overdraft at Laiki — which, like the Bank of Cyprus and other financial institutions here, took large losses on their holdings of Greek debt and lost piles of money lending to now bankrupt businesses in Greece.
The client, a midsize electronics retailer that imports Playstations, X-Boxes and video games, must pay his suppliers by the end of the month — this Friday — for products he already imported to Cyprus. But the importer will not be able to collect payments from customers until the end of April. Mr. Zertalis has sought financing from abroad, and has been working to get an extension from his client’s suppliers.
“If you deal with a multinational in New York and you are a small player, they don’t care” that Cyprus banks are having a problem, he said. “You’re just an account that’s now become a headache for them.”“If you deal with a multinational in New York and you are a small player, they don’t care” that Cyprus banks are having a problem, he said. “You’re just an account that’s now become a headache for them.”
The effect of all this is likely to accelerate throughout the Cypriot economy, which in its headlong rush to modernize now imports almost everything it consumes. When Cyprus joined the European Union, it received subsidies that encouraged farmers to stop producing crops like olive trees and grape vines and move toward a more services-based economy. Manufacturing of goods as varied as pharmaceuticals, shoes and soaps also wound down. As the banking sector shrinks, Cyprus’s service-oriented economy will shrink with it.
If the banking sector cannot be saved, the blow to the economy, which already contracted by 2.4 percent last year, will be hard to endure. Mr. Zertalis says his e-mail account has been flooded with offers from banks in Switzerland, Germany, Luxembourg and the Netherlands saying he can open accounts there within an hour should he choose another location to guard his clients’ money.
Unemployment, now at 15 percent, could rise rapidly. An estimated 5,000 people at Laiki Bank will lose their jobs. If something happens to Bank of Cyprus, another 5,000 jobs are at stake. Such numbers matter to such a small population.
Mr. Zertalis says his e-mail account has been flooded with offers from banks in Switzerland, Germany, Luxembourg, and the Netherlands saying that he can open new accounts there within an hour, should he choose another location to safeguard his clients’ money.
“They are targeting Cyprus,” he said. “We are going to see hard times coming here. This is only the beginning.”“They are targeting Cyprus,” he said. “We are going to see hard times coming here. This is only the beginning.”