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Saving Cyprus

  • March 26th, 2013
  • Posted by EUEditor

cyprus-flag.jpg eu-flagg-eu.jpgIntense discussions in Brussels throughout the weekend (24-25.3.13) produced a settlement for Cyprus, set to end its time as a financial centre providing a haven for overseas depositors.

The financial crisis is to be managed with the application of a €10-billion (A$12.3-billion;, 25.3.13) guarantee on loans, and the use of large deposits in the country’s banks to service debt.


The agreement was reached among government leaders from Nicosia, and senior officials of the European Union, the Central European Bank and International Monetary Fund, and Finance Ministers from the Euro Zone – the 17 EU states using Euro currency.

Announced in the early hours of Monday morning, the plan involves a banking restructure, with many complications to be settled by officials in the coming weeks; controls to follow, including restrictions on mony exports, and for this week, closure of all banks until Thursday at least, with strict limits on withdrawals.

However the arrangement can be described in broad terms:

The EU wants a substantial commitment from the country’s own resources to match the €10-billion, with perhaps half that amount, up to €7-billion (A$8.6-billion); and that is to come mostly from a levy on large bank deposits.

A summary from Reuters on Monday:

“Backed by Euro Zone Finance Ministers, the plan will wind down the largely state-owned Cyprus Popular Bank, known as Laiki, and shift deposits under €100,000 to the Bank of Cyprus to create a ‘good bank’, leaving problems behind in, effectively, a ‘bad bank’.

“Deposits above €100000 (A$123000) in both banks, which are not guaranteed by the state under EU law, will be frozen and used to resolve Laiki’s debts and recapitalise the Bank of Cyprus, the island’s biggest, through a deposit/equity conversion.”


A communiqué from the Eurogroup, the Finance Ministers at Brussel said that strategy would see the overgrown financial sector of Cyprus reduced to a normal scale, while the country would be pressured to follow an austerity program to complete the consolidation:

“The programme will contain a decisive approach to addressing financial sector imbalances. There will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018. In addition, the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatisation.”

The weekend decision eclipsed a plan to put a tax on all deposits in the country, 6.5% on smaller deposits, 9.99% on those of over €100000. Not possible for local politicians to accept, in the face of a panicked and angry public reaction, it was unanimously rejected by the parliament last week, and referred back to the EU for another look.

The new move spares local citizens but imposes a bigger impost on larger investors, including wealthy Russians, who may see 20-30% of their balances appropriated. (Russian deposits are broadly estimated at €30-billion – A$36.9-billion)


cyprus-beach-1.jpgThis draws attention to the global aspect of the small country’s plight: It is both part of the Euro system which needs to avoid collapse in any of its parts, for fear of a contagion of losses; and, with its ambitions as a banking centre, it has been home to shifting amounts of money in bulk.

Even in the last week, the Cyprus government appealed for an increase in the €2.5-billion (A$3.07-billion) already advanced to it from Russia; raising the notion of a Russian colony within the EU, but raising expectations also, that European interests would have been speaking against that idea in Moscow.


Said this commentary in Forbes magazine:

“If you are the average Cypriot, at least in the short term this is probably a pretty neat solution, since your first €100,000 is safe, and the balance of your nation’s debt will be mostly paid from the deposits of wealthy Russians.

“Conversely, if you are a wealthy Russian depositor in a Cyprus bank, this is a pretty raw deal. The money that Cyprus has repeatedly promised you would be absolutely safe is now being effectively nationalised by Cyprus to pay its debt, and for things which you never received any benefit. No wonder that the Russian apparatchik is grumbling about maybe turning off Europe’s natural gas supplies in retaliation. On the other hand, they might comfort themselves, if Cyprus was suddenly thrown off the Euro their losses might have been much worse.

“That is unlikely to happen, but what has already happened (whether Cypriots will admit it or not) is that Cyprus is dead as an offshore haven. Who in their right mind would deposit money in a country which simply raids deposits without warning to pay its debts?”

The Russians Prime Minister, Dmitri Medvedev, called it “stealing”, though his government has agreed to consider restructuring its €2.5 billion loan.


cyprus-harbour.jpgIn the background, the finance industry of Cyprus began to over-reach itself in the 1990s, attracting large deposits with favourable rates, later over-borrowing in a low-interest climate. It then came under pressure after the Global Financial Crisis; its problems compounded as money  was taken out by depositors to meet urgent demands abroad, and by bad investments in Greece – values in that country collapsing under the weight of the crisis there.

cyprus-towns.jpg“Stick to tourism” might be the better policy for now; though never-say-die political leaders have been pressing for early development of off-shore natural gas reserves in the country’s economic zone, even this week talking of mortgaging those against future debt.

Stock exchanges reacted nervously to the outcome on Cyprus, most clearly in response to comments attributed to Jeroen Dijsselbloem, the Dutch Finance Minister and chairman of the Eurogroup at Brussels, that visiting bank deposits could become a “template” for handling such crises, calling it “pushing back the risks.”


Jay Adkisson, “Cyprus And The Death Of An Offshore Haven”, Forbes Magazine, NY, 25.3.13., (26.3.13).

European Council, Brussels, Eurogroup Statement on Cyprus, 25.3.13., (26.3.13).

David Jolly, “Official Europe’s Reaction to Cyprus Deal Is Mixed”, NYT, NY, 25.3.13., (26.3.13).

Le Monde, Paris, “Chypre : les banques resteront fermées jusqu’à jeudi” (Banks staying shut until Thursday in Cyprus),25.3.13.

Michele Kambas and Karolina Tagaris, “Cyprus leader hails bailout, but banks stay closed”, Reuters, London, 25.3.13., (26.3.13).