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Cyprus Sets Up Tight Controls as Banks Prepare to Reopen Cyprus Sets Up Tight Controls as Banks Prepare to Reopen
(about 4 hours later)
NICOSIA, Cyprus — Cyprus‘s government announced severe restrictions Wednesday on access to the country’s bank accounts, hoping to curb what is nonetheless likely to be a rush to withdraw money when banks reopen on Thursday for the first time in nearly two weeks. NICOSIA, Cyprus — The Cypriot government on Wednesday announced severe restrictions on access to funds held in the country’s banks, hoping to curb what is nonetheless likely to be a rush to withdraw money when the banks open Thursday for the first time in nearly two weeks.
The measures, which are supposed to be in effect for only a week but could be extended, will bar electronic transfers of funds from Cyprus to other countries. And individuals will not be allowed to take more than 3,000 euros cash outside the country, well below the current restriction of 10,000 euros, or $13,000. The measures, which are supposed to be in effect for only a week but could be extended, will prohibit electronic transfers of funds from Cyprus to other countries. In addition, individuals will not be allowed to take more than 3,000 euros in cash outside the country, well below the current ceiling of 10,000 euros, or $13,000.
Credit and debit card charges will be capped at 5,000 euros per person per month. And checks cannot be cashed, although they can be deposited. The cap on withdrawals from automated teller machines will rise to 300 euros per day from 100 euros, but credit and debit card charges will be capped at 5,000 euros per person per month. Banks will not cash checks, though they will accept checks as deposits. Bank clients will also not be able to withdraw money from fixed-term deposits before their maturity date.
The Cypriot finance minister, Michalis Sarris, said Wednesday that a flood of withdrawals was bound to happen quickly, anyway, but that the restrictions would at least help stem a mass flight of deposits. “This is a typical set of exchange control measures, more reminiscent of Latin America or Africa,” said Bob Lyddon, the general secretary of IBOS, an international banking association. “There is no way these will only last seven days. These are permanent controls until the economy recovers.”
“Each day that banks remain closed creates more uncertainty and more difficulties for people, so we would like to do our utmost to make sure that this new goal that we have set will work,” he said. To make sure enough cash is on hand, the European Central Bank sent an airplane filled with about 1.5 billion euros in a container to Larnaca airport near Nicosia on Wednesday afternoon. The container was loaded onto a truck and escorted by police cars to the Cypriot central bank for safekeeping, said a person with knowledge of the operation, who requested anonymity because he was not authorized to speak publicly.
Despite those strictures, Cypriot authorities are bracing for as much as 10 percent of the 64 billion euros in deposits in the country’s banks to be pulled out on Thursday. The cap on cash machine withdrawals will rise to 300 euros from 100 euros. The person said the E.C.B. had indicated it would continue flying cash to the country as needed to meet banks’ needs.
And some experts predict a much bigger bank run whenever the controls are eventually lifted. The Cypriot finance minister, Michalis Sarris, said Wednesday that a flood of withdrawals was bound to happen quickly anyway, but that the restrictions would at least help stem a mass flight of deposits.
“Each day that banks remain closed creates more uncertainty and more difficulties for people, so we would like to do our utmost to make sure that this new goal that we have set will work,” Mr. Sarris said.
Despite those strictures, the Cypriot authorities are bracing for as much as 10 percent of the 64 billion euros on deposit in the country’s banks to be pulled out on Thursday.
Some experts predict a much bigger bank run whenever the controls are eventually lifted.
“If you don’t impose the controls, the money is going to fly,” said Mujtaba Rahman, a senior analyst at Eurasia Group. “But when you remove those controls, clearly the money is going to leave anyway. So they’re in a Catch-22.”“If you don’t impose the controls, the money is going to fly,” said Mujtaba Rahman, a senior analyst at Eurasia Group. “But when you remove those controls, clearly the money is going to leave anyway. So they’re in a Catch-22.”
Adding to the tensions here, the chief executive of Bank of Cyprus, the nation’s largest bank, was fired Wednesday by the central bank. That move came in consultation with the international lenders who are finalizing the terms of a 10-billion-euro bailout of the heavily indebted country. The chief executive of Bank of Cyprus, the nation’s largest bank, was fired Wednesday by the central bank. He will be replaced by an administrator overseeing the bank’s consolidation. That move came in consultation with the so-called troika of international lenders — the European Commission, the European Central Bank and the International Monetary Fund — that are finalizing the terms of a 10 billion euro bailout of the heavily indebted country.
Meanwhile, President Nicos Anastasiades opened a criminal investigation into how the country’s banks had been brought to the brink of collapse. His aim, he said, was “to find and attribute responsibility wherever it belongs.”Meanwhile, President Nicos Anastasiades opened a criminal investigation into how the country’s banks had been brought to the brink of collapse. His aim, he said, was “to find and attribute responsibility wherever it belongs.”
Tension has intensified in Nicosia, the capital, in recent days as citizens, confronted with banks that have been closed since March 16, have grown impatient waiting for the bailout deal to be completed so they can get access to their money. Many are also angry at what they see as Mr. Anastasiades’s inept political handling of the situation. Stress has intensified in recent days in Nicosia, the capital, as people have grown impatient waiting for the bailout deal to be completed so the banks can reopen and they can get access to their money. Many are also angry at what they see as Mr. Anastasiades’s inept handling of the situation, while others harbor suspicions that the I.M.F. and Germany are using Cyprus to test how similar measures might work in other European countries that might require bailouts in the future.
Demonstrations that first attracted hundreds here last week have been swelling into increasingly agitated gatherings of thousands of people amid the dawning realization that their future under the terms of the bailout deal will become increasingly bleak. 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.
At the same time, a blame game has escalated among the ruling class. 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. 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.
“The knives are out,” said a person involved in the talks, who declined to speak publicly because the talks were private. At the same time, the governing class is attempting to shift the blame for the debacle.
Under European Union 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 European Central Bank and E.U. leaders find it convenient to do so. 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.
A person involved in forging the details of how capital controls will be implemented in Cyprus acknowledged Wednesday that such restrictions ideally would be avoided. But “if you did not have them, then probably 100 percent of deposits would fly out of the country,” the person said. “The knives are out,” said a person with knowledge of the situation, who requested anonymity because he was not authorized to speak publicly.
Nonresident depositors, including Russians and businesses with substantial amounts in Cypriot banks, are especially eager to get their money out, the person said. 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.
Faith in Cyprus’s banks has been severely undermined, not only because Mr. Anastasiades and E.U. leaders introduced the idea of skimming savers’ accounts to pay for the bailout, but also because the authorities have prolonged bank closures for such a long time. 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.
If Bank of Cyprus does not reopen for some reason on Thursday, “it will create a self-fulfilling prophecy that we have a problem that can’t be resolved,” the person said. 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.
The cost of bailing out the island’s two largest banks, Bank of Cyprus and Laiki Bank, is to be borne by the banks’ large, uninsured depositors. 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.
At a news conference Tuesday, Mr. Demetriades, the central bank governor, said he expected big depositors at Bank of Cyprus to get a “haircut,” or loss, of about 40 percent on their €14 billion in long-term deposits. In exchange, depositors will receive shares in a recapitalized bank. 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 with many economists now estimating that the Cypriot economy will contract 5 percent to 10 percent this year, it could be that the depositors will have to take a bigger loss so that the bank can free up cash to protect its rapidly deteriorating loan book. 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.
At Laiki Bank, which is even worse off, about €4 billion in deposits will be put in a bad bank and is most likely to be wiped out as the bank is wound down. 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.
Instability has gripped the Bank of Cyprus in recent days. The central bank has essentially directed every step the private bank must take since Cyprus’s creditors demanded that the nation’s second-largest bank, Cyprus Popular Bank, fold and move a large number of accounts to Bank of Cyprus. 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.
The Bank of Cyprus chief executive, Yiannis Kypri, has protested what he called central bank interference with a private company and tendered his resignation Tuesday, a move that was rejected by the bank’s board. “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.
But on Wednesday, the central bank chief, Mr. Demetriades, forced out Mr. Kypri and the entire Bank of Cyprus board in a joint decision with international lenders as part of the legal moves required for that bank to be consolidated. “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.”
On Tuesday a huge crowd gathered in front of Bank of Cyprus, shouting angrily about the devastation that the recent measures would wreak on jobs and the economy. The crowd then headed to the central bank to demand the resignation of Mr. Demetriades, whom many see as handling the situation with an iron fist.
By imposing capital controls, European and Cypriot officials have effectively created two classes of euro — a good and a bad. If a depositor has €1 million in a Cypriot bank but cannot access it or take it to another country, then the money is effectively worthless, since it cannot be spent in Cyprus or abroad.
“It has to be acknowledged that this is something entirely new,” said Nicolas Véron, a senior fellow at Bruegel, a research concern 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 said. “This will shape expectations in other countries, and the issue is whether capital controls can be avoided in future episodes.”