Limits on transactions as Cyprus banks reopen

Friday 29 March 2013 09.20
Queues formed outside a number of banks in Nicosia this morning (Pic: Will Goodbody)
Queues formed outside a number of banks in Nicosia this morning (Pic: Will Goodbody)

Cyprus has conceded that tight capital controls will remain in force longer than expected as the country's banks reopened.

The banks closed on 16 March after the government was forced to accept a tough EU rescue package to avoid bankruptcy.

Cypriots queued calmly to withdraw limited amounts of cash, but there was no sign of a run on deposits, as had been feared.

Banks were shut for nearly two weeks.

The government negotiated a €10bn international bailout package, the first in Europe's single currency zone to impose losses on bank depositors.

Foreign Minister Ioannis Kasoulides has said that curbs on money movements imposed after the bailout will be phased out in about a month.

The government initially said the controls would remain in place for a week, subject to review.

Economists say they will prove hard to lift as long as the economy is in crisis.

Bank staff turned up for work early as cash was delivered by armoured trucks, and queues of a dozen or more people formed at bank branches in the capital, with uniformed security guards on duty.

Doors opened at 10am Irish time and closed at 6pm, but there was no visible run on deposits.

A lot of money had already left electronically.

Figures published by the Central Bank of Cyprus showed that savers from other eurozone countries withdrew 18% of their deposits from the country in February, as talk of a tax on bank accounts gained ground.

Overall private sector bank deposits in Cyprus fell by 2.2% to €46.4bn last month, after a similar drop in January.

To help the Cyprus banks weather the crisis, the European Central Bank flew in €5bn euros in cash overnight from Frankfurt, a German newspaper reported.

The government said it had appointed a panel to investigate the banking meltdown and look into claims of junior bondholders.

The capital controls decree was taped to the windows of bank branches and staff handed out copies to customers. In Nicosia, there was relief, but some apprehension about what might happen.

The stock exchange said it would remain closed today.

A Finance Ministry decree limited cash withdrawals to no more than €300 per day and banned the cashing of cheques.

The island's central bank will review all commercial transactions over €5,000.

It will scrutinise transactions over €200,000 on an individual basis. People leaving Cyprus may take only €1,000 with them.

A police source told Reuters that passengers leaving Cypriot airports were subject to extra searches.

Notices at Larnaka Airport warned travellers of the new restrictions and officers had orders to confiscate cash above the €1,000 limit.

With just 860,000 people, Cyprus has about €68bn in its banks.

It has a vastly outsized financial system that attracted deposits from abroad, especially Russia.

It was an offshore haven but foundered when investments in neighbouring Greece went sour.

The European Union and International Monetary Fund concluded that Cyprus could not afford a rescue unless it imposed losses on depositors, seen as anathema in previous eurozone bailouts.

Foreign Minister Kasoulides reflected the anger of many Cypriots when he told French newspaper Les Echos: "Europe is pretending to help us but the price to pay is too high: nothing less than the brutal destruction of our economic model."

Cyprus's difficulties have sent jitters around the fragile single European currency zone.

Yields on Slovenia's two-year bonds surged to nearly 7% today.

This is a sign that investors are pricing in a high risk of default, despite denials by the new Slovenian government that it needs a bailout.

The imposition of capital controls has led economists to warn that a second-class "Cyprus euro" could emerge, with funds trapped on the island worth less than euro that can be freely spent abroad.

Reflecting fears of a spillover, ratings agency Moody's said it kept  Ireland and Portugal on negative outlook, citing the Cyprus bailout as an extra risk.

The European Commission said the capital controls were legal and justified under EU law provided they were strictly temporary and proportionate.

The EU executive said it would monitor "the need to extend the validity of or revise the measures".

The bailout, agreed in Brussels on Monday, looks set to push Cyprus deeper into an economic slump, shrink the banking sector and cost thousands of jobs.

Cyprus Popular Bank, the country's second biggest, will be closed and its guaranteed deposits of up to €100,000 transferred to the largest bank, Bank of Cyprus.

Deposits of more than €100,000 at both banks, too big to enjoy a state guarantee, will be frozen, and some of those funds will be exchanged for shares issued by the banks to recapitalise them.

While big depositors will lose money, the authorities say deposits up to €100,000 will be protected.

Keywords: cyprus, banks