Cyprus: "The Money is Going to Stay There for a Very Long Time"

Banks are scheduled to open tomorrow in Cyprus and rules outlining how people can access their money are still being promulgated. This is from today's story, "In Cyprus, Big Losses Expected on Deposits," by Landon Thomas Jr.:

The government is also struggling to come up with some form of capital controls in a bid to prevent too much money from draining from the banks and leaving the country. Given that more than 30 percent of the Bank of Cyprus’s 14 billion euros in long-term deposits belongs to foreigners — mostly Russians and Greeks — who would not hesitate to take their money out of the country, the restrictions on those funds are likely to be onerous, bankers say. 

“That money is going to stay there for a very long time,” said one person who has been involved in the discussions, but who requested anonymity because he was not authorized to speak publicly.

Beyond the challenge of dealing with the large depositors is the question of what to do with about 27 billion euros in deposits in accounts under 100,000 euros that now carry the Cypriot government’s full backing, following last weekend’s reversal of the decision to tax those deposits, too. That figure alone exceeds Cyprus’s annual gross domestic product of 18 billion euros. 

If the banks reopen on Thursday, as planned, Cyprus’s shellshocked citizens will have access to their insured deposits for the first time in more than a week. With their bills and fears mounting, it is widely expected that many will immediately seek to remove these funds from the banks. 

For now, officials say, it is likely that uninsured depositors will face stiff restrictions when it comes to withdrawing money from an automated teller machine or sending money abroad. But if a depositor at Bank of Cyprus wanted to transfer funds to, say, Hellenic Bank, a smaller institution that is in better shape, the controls would be less severe because that money would remain within the Cypriot banking system. Such arcane mechanisms are now being thrashed out in Brussels and Frankfurt.

With more time to consider the bailout an assessment has gone from bad to worse. The low end of the haircut, 30%, for uninsured depositors at the Bank of Cyprus has given way to the high end, 40%, because the bailout estimate of a 3% contraction of Cyprus' economy is being reassessed as too modest; now, according to Thomas' story, economists are predicting a shrinkage of 5%-10% within a year.

Andrew Higgins and Liz Alderman have a good "how we got here" story today, "Europeans Planted Seeds of Crisis in Cyprus." The Eurogroup's decision in October 2011 to make private-sector investors take a 50% write-down on Greek government bonds doomed Laiki Bank. Higgins and Alderman conclude their story with seven paragraphs that pretty much sum up the whole story heretofore. And the gist of it is that the eurozone is finished:

After the Greek write-down, Cyprus compounded its problems by dithering on whether to seek a bailout from the European Union. At first, it appealed to Russia, which provided a 2.5 billion-euro loan in December 2011. But this money quickly ran out, and when Cyprus did finally go cap-in-hand to its European partners for a lifeline, it received a rude shock: Germany, already gearing up for an election this year, wanted not just budget cuts and other conventional austerity measures but a complete overhaul of Cyprus’s economic model, built around financial services for foreigners seeking ways to dodge taxes and, Berlin suspected, launder dirty money. 

“They did not want the Cypriot model to exist as it did — they wanted Cyprus to stop being a financial center,” said Pambos Papageorgiou, a former central bank board member who is now a member of parliament and on its finance committee. “It was very brutal, like warfare.” 

Mr. Papageorgiou complained that the European Union had shown “the opposite of solidarity” in its dealings with one of its weakest and most vulnerable members. 

In the three years since Europe’s rolling debt crisis first exploded in Greece, governments and citizens in the hardest-hit nations have fumed that decisions made in Brussels pay little heed to their interests and are dictated instead by the economic concerns and election cycles of Germany. Whether in Athens, Dublin, Rome, Madrid or Nicosia, people increasingly ask whether the European Union serves their own aspirations or those of remote institutions dominated by others, particularly Germans. 

Such questions have grown to a furious pitch in Cyprus, where terms set early Monday for a 10 billion-euro bailout will deepen an already painful recession and send unemployment — now at 15 percent — soaring. They require the dismantling of Laiki Bank, with the loss of around 2,500 jobs, and a significant reduction in the country’s role as an offshore financial center. 

“We are looking at a very grim future for Cyprus,” said Michael Olympios, chairman of the Cyprus Investor Association, a lobbying group. “Even firm believers in European project like myself see now that it was a bad idea and that we should have at least stayed out of the euro.” 

As jobs disappear and the economy contracts, Mr. Olympios said, faith in Europe will wither. “I used to be a believer. Not anymore.”

The eurozone will continue on for some time of course. But this is the beginning of the end. Bigger is not always better. The idea has finally sunk in.