The Cypriot banks are open for the first time in almost two weeks amid concerns that the capital controls designed to prevent a run on the banks will not be lifted soon.
The banks reopened a noon, Cyprus time, allowing customers of the two largest banks, Bank of Cyprus and Popular Bank, to withdraw up to €300 ($384 U.S.) of cash per day. Other transactions were severely curtailed too; cashing cheques and terminating time deposits were banned. The Cypriot stock exchange remained closed.
Business transactions will be limited to €5,000 per account per day. Transfers outside the country, via debt and credit cards, will be limited to the same amount. In a statement, Thursday, the Cypriot finance ministry said: “These measures are temporary. The central bank of Cyprus and the government of Cyprus will review them each day, with a view to progressive lifting of the measures as soon as circumstances allow.”
There was some confusion whether “temporary” meant they would be in place a few days, up to a week, or potentially much longer if the bank branches are rapidly drained of cash.
The European Commission said the capital controls should be lifted as soon as possible, but said the controls were legal. “In current circumstances, the stability of financial markets and the banking system in Cyprus constitutes a matter of overriding public interest and public policy justifying the imposition of temporary restrictions on capital movements,” the EC said.
Initial reports said there was no panic or disorder at the bank branches, though there were fears in recent days that some branches would be attacked. Police security was high and some branches would let only a few customers in at a time. The Telegraph newspaper reported that the main attraction outside one Bank of Cyprus branch in Nicosia, the capital, was an 87-year-old man with a 67-year-old parrot on his head.
“Morning images of armed Cypriot police stationed outside banks to prevent civilians from withdrawing their own money stands as a vivid metaphor for how far the euro zone has fallen, and will no doubt focus the minds of equity investors,” said Matt Basi, head of British trading at CMC Markets UK.
The capital controls are the first adopted by a euro zone country. While the controls are meant to be temporary, there is a sense they could endure. Iceland (which is not a member of the euro zone) imposed capital controls during it bank crisis in 2009. At the time, Iceland’s central bank said it will “begin lifting controls in the next few months.” Four years later, they are still in place.
Economists said the danger of long-term capital controls is that they would make a mockery of the free-flow of capital across borders, one of the cornerstones of the euro zone and its common market. In effect, locking euros in Cyprus reduces their value because they can’t be freely spent or transferred.
“If [the controls last] only very temporarily, it may not be a big deal,” Nomura economist Jens Nordvig said in a note Thursday. “If more permanently, the effect will be pronounced. Since we don’t know for sure, we are arguably in a grey zone regarding whether the Euro has broken. We are in an in-between-world, where there has been no official decision to exit the euro, but where euros in Cyprus are different from the ones elsewhere in the euro zone.”
The banks had been closed since March 16, when negotiations for a €10-billion bailout from the European Union and the International Monetary Fund turned critical. To bring down the cost of restructuring and recapitalizing the nearly dead banks, the initial proposal contemplated a substantial “haircut” on all depositors – a first in a euro zone country.
The proposal was rejected early last week by the Cypriot parliament, and the European Central Bank threatened to eliminate emergency liquidity injections to Bank of Cyprus and Popular Bank on Monday unless a bailout agreement were reached.
The new plan, which has been endorsed by the Cypriot government and the Eurogroup (the euro zone’s 17 finance ministers), will see Popular Bank (also known as Laiki Bank) unwound, wiping out shareholders and bondholders. Popular will be split into a “good bank” and a “bad bank.” The former will get the viable assets and insured deposits, that is, deposits up to €100,000. The rest, including about €4.2-billion of deposits over €100,000, will go into the latter, with no assurances that the wealthy depositors will get any of their money back.
The good bank will then be merged with the leading commercial bank, Bank of Cyprus, which is to be recapitalized by forcing losses on the bondholders and uninsured depositors. The amount of damage the uninsured bondholders are to suffer is unknown, but various reports said the uninsured depositors could lose as much as 40 per cent.
The biggest depositors in both banks will receive shares in the new Bank of Cyprus in compensation for their deposit losses, though there are no assurances that the bank will survive over the medium to long term as the Cypriot economy, already in recession, goes into depression territory. Several economists have said the economy could shrink 20 per cent in the next few years as the financial services sector, the mainstay of the Cypriot economy, shrinks drastically, sending the jobless rate soaring to 14 per cent or higher.