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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 5 hours later)
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. NICOSIA, Cyprus — The Cypriot government on Wednesday announced severe restrictions on access to funds held in the country’s banks, hoping to control 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 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. The measures, which are supposed to be in effect for only a week but are widely expected to be extended in some form well into the future, will prohibit electronic transfer of funds from Cyprus to other countries. In addition, individuals will not be allowed to take more than 3,000 euros (about $3,860) in cash outside the country, well below the current ceiling of 10,000 euros.
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 cap on withdrawals from automated teller machines will rise to 300 euros a day from 100 euros, but credit and debit card charges will be limited to no more than 5,000 euros a person a month. Banks will not cash checks; they will accept checks as deposits, but many people will no doubt be reluctant to put more money into a bank. Bank clients also will not be able to withdraw money from fixed-term deposits before their maturity date.
“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.” “This is a typical set of exchange control measures, more reminiscent of Latin America or Africa,” said Bob Lyddon, the managing director of IBOS, an international banking association. “There is no way these will only last seven days. These are permanent controls until the economy recovers.”
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. 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. The container was loaded onto a truck and escorted by police 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.
The person said the E.C.B. had indicated it would continue flying cash to the country as needed to meet banks’ needs. The person said the European Central Bank had indicated it would continue flying cash to the country as needed.
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.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.“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.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. Experts predict a much bigger bank run whenever the controls are eventually lifted or eased further.
“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 the Eurasia Group. “But when you remove those controls, clearly the money is going to leave anyway. So they’re in a Catch-22.”
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. As part of the effort to clean up the situation, the chief executive of the Bank of Cyprus, the nation’s largest bank, was fired Wednesday by the central bank, along with the bank’s entire board. 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 completing the terms of a 10 billion euro bailout for Cyprus to help it absorb the blow from the collapse of its outsize banking system.
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.” Also, President Nicos Anastasiades announced the opening of 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.”
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. Stress has intensified in recent days in Nicosia, the capital, as Cypriots have grown impatient waiting for the bailout deal to be completed so the banks can reopen and they can get somewhat greater access to their money. Many are also angry at what they see as the inept handling of the situation by Mr. Anastasiades. Others harbor suspicions that the I.M.F. and Germany are punishing Cyprus in part because of its role as a money haven that opened a window for wealthy foreigners to move their funds into the euro zone with few, if any, strictures.
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. Demonstrations that attracted hundreds here last week have swelled into gatherings of thousands of people who have grown more agitated as they realize that their future under the terms of the bailout will be bleak.
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.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. The governing class is trying to deflect 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.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 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. The cost of bailing out the island’s two largest banks, the 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. At a news conference on Tuesday, Mr. Demetriades said he expected big depositors at the 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. But with the economy deteriorating rapidly, 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. Laiki, also known as the Cyprus Popular Bank, is even worse off. About four 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. Under European Union treaties, restricting the free movement of capital is forbidden. Critics say that what is happening in Cyprus shows that union rules will be flouted when the International Monetary Fund, the European Central Bank and European Union leaders find it convenient to do so.
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. 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, effectively diminishing its value.
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. “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. “This will shape expectations in other countries, and the issue is whether capital controls can be avoided in future episodes.”
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.

Landon Thomas Jr. contributed reporting from Nicosia.

“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.”