As new President Nicos Anastasiades hesitated over an EU bailout that has wrecked Cyprus’s offshore financial haven status, money was oozing out of his country’s closed banks.
Large amounts of euros fled the east Mediterranean island – via banknotes at cash machines and exceptional transfers for “humanitarian supplies” – before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.
EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. “The amount the Cypriots mentioned … on a daily basis was much less than it was in reality,” the source said.
Confusion over just how much money was pulled out of Cyprus’s banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 per cent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc’s debt crisis. Cyprus’s problems began in Greece – it is heavily exposed to the euro zone’s first bailout casualty.
No one knows exactly how much money has left Cyprus’s banks, or where it has gone. The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 per cent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.
While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.
Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.
Chris Pavlou, who was vice-chairman of Laiki until Friday, said while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions.
German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.
Big depositors, including wealthy Russians and Britons, whom the Cypriot president had sought to shield from a levy of any more than 10 per cent on their holdings, will end up being far more severely burned – if their money is still there.
Under a bailout deal sealed early on Monday morning in snowy Brussels, Cyprus will have to shut its second largest bank and inflict heavy losses on large account holders.
Deposits over €100,000 ($128,540 U.S.) in both will be frozen and used to resolve the debts of the defunct Laiki and recapitalize Bank of Cyprus. Both banks were hurt by their exposure to Greek sovereign debt when bondholders were forced to take writedowns last year.
By Sunday, one participant in the negotiations said, there was almost no capital left in Laiki, a bank whose market value peaked at €8.1-billion in November 2007. Laiki’s former vice-chairman Mr. Pavlou disagreed, estimating there had been €2.5-billion in foreign deposits alone.
No figure was announced for the scale of the “haircut” on big depositors, but it will be nearer to 50 per cent than to the 15 per cent that Mr. Anastasiades rejected on March 15, participants in the negotiations said, speaking on condition of anonymity.
To enable him to negotiate with politicians of his own protocol rank, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso conducted the talks with Mr. Anastasiades, elected last month.
At one point on Sunday afternoon, the conservative president threatened to resign in an emotional exchange with the heads of the EU institutions and the International Monetary Fund.
The troika of lenders called his bluff, saying that if he quit they would continue negotiations with the speaker of the Cypriot parliament, next in line constitutionally, a participant in the talks said. Mr. Anastasiades stayed.
For months, bailout talks with his Soviet-educated Communist predecessor, Demetris Christofias, had gone nowhere due to his refusal to privatize state assets. “[Mr.] Christofias didn’t want to be the president who had signed a bailout with the troika,” an EU official said.
The cost of a rescue kept mounting. By the time the new leader was ready to do a deal, the IMF and Germany were demanding a 40-per-cent across-the-board bail-in of creditors and depositors in the two main banks.
German Finance Minister Wolfgang Schaeuble said Berlin had achieved exactly what it sought in exchange for the €10-billion financial rescue – that creditors and uninsured depositors in the two biggest Cypriot banks should share the load.
“This is bitter for Cyprus but we now have the result that the (German) government always stood out for,” he said.
An EU source said the IMF and Germany had initially wanted to go further and wind down both Laiki and Bank of Cyprus.
European politicians, anxious to deflect criticism for having been party to an initial deal 10 days ago that would have imposed a levy on all small savers in Cyprus, rushed to say that Nicosia had only itself to blame.
“To all those who say that we are strangling an entire people … Cyprus is a casino economy that was on the brink of bankruptcy,” French Finance Minister Pierre Moscovici said.
He said he had always opposed taxing deposits smaller than €100,000, which are subject to an EU guarantee. Yet neither he nor other ministers or European Commission officials spoke out against the idea at the March 15 meeting, participants said.
Only when a firestorm of protest erupted in Cyprus and it became clear the Cypriot parliament would not endorse the plan did they belated call for accounts under the €100,000 threshold to be left untouched.
Perhaps the most disastrous episode in a week of blunders and miscalculation was the Cypriot attempt to persuade Russia to provide alternative finance in return for future access to the island’s untapped offshore gas reserves.
Cypriot lawmakers overplayed their hand in rejecting the deposit levy in the misguided belief that Moscow would come to the island’s aid. Cypriot Finance Minister Michael Sarris was dispatched to Moscow without any clear game plan or mandate the day after the 56-member legislature voted 36-0 to reject the levy, a source close to his delegation said.
After a frosty initial meeting on Wednesday, at which his Russian counterpart offered nothing in response to his request for a new €5-billion loan and easier repayment terms on an existing €2.5-billion credit, Mr. Sarris was left to stew in his suite at the Lotte Plaza hotel on Moscow’s Garden Ring.
Russian gas monopoly OAO Gazprom denied reports that it was considering lending Cyprus money in return for future access to its gas, and VTB Bank, Russia’s No. 2 bank, disavowed any interest in buying Laiki.
The Russians kept Mr. Sarris waiting all day Thursday. Talks only resumed at 9 p.m. and went nowhere. By midnight, he knew he would be returning to Nicosia the next morning empty-handed, although his hotel suite was booked until Monday.
The European Commission and the ECB had quietly told the Russian Finance Ministry and central bank that any further loan from Moscow would just add to Cypriot debt and hence undermine the basis for an EU-IMF bailout, sources with knowledge of the exchange said.
Russian Prime Minister Dmitry Medvedev accused the EU of handling the Cyprus crisis “like a bull in a china shop.” He and President Vladimir Putin complained to visiting European Commission President Mr. Barroso that Moscow should have been consulted before the decision to impose a levy on depositors.
Mr. Barroso responded that Europe and Russia each had their own procedures and he was not there to negotiate with Russia about Cyprus, an EU source familiar with the talks said. Despite Kremlin anger, Moscow decided it would not let itself be played off against Brussels.
The most powerful force pushing Cyprus to accept a deal was the European Central Bank, which for months had kept the country afloat despite growing internal misgivings about the banks’ solvency.
Hours before the ECB announced that it would turn off the ELA taps for Cypriot banks on Monday, a Cypriot lawmaker said: “[Mr.] Anastasiades is just trying to scare parliament. The ECB would never do that, it needs a two-thirds majority.”
ECB officials contacted Latvia, another EU country that has received large Russian deposits, to warn authorities against taking in Russian money fleeing Cyprus, two sources familiar with the contacts said.
“It was made clear to our Latvian friends that if they want to join the euro, they should not provide a haven for Russian money exiting Cyprus,” a euro zone central banker said.
Even after a week of drama in Nicosia and disillusionment in Moscow, Mr. Anastasiades and his team seemed not to comprehend when they arrived in Brussels on Sunday the magnitude of the collapse they were facing.
“It took more time for the Cypriots and the Cypriot authorities to fully understand what their options were and how deep the crisis was,” Jeroen Dijsselbloem, the Dutch chairman of euro zone finance ministers, told Reuters in an interview.
“It’s hard for me to say what made the penny drop, I think it was probably because it was five to midnight, literally it was five to midnight, and we were not making much progress and we simply said to the Cypriots: ‘Look, we’re ready to help you, there’s 10 billion available, but you have to realize what the present situation is. You have to act now. Political choices have run out.’ There was a deadline. And that worked.”