Cyprus banks reopen amid simmering tension

 

By Nick Squires, in Nicosia 4:50PM GMT 28 Mar 2013

Cypriots formed orderly queues outside the country’s banks after they reopened for the first time in nearly two weeks on Thursday, confounding fears that there would be scenes of unrest and violence.

Although people waited patiently outside banks across the Mediterranean island, feelings of anger and frustration were just below the surface. Photo: Getty Images

Analysts said it was little surprise that there was no run on the banks in light of the draconian capital control restrictions that the Cypriot government hurriedly imposed late on Wednesday night.

It decreed that cash withdrawals would be limited to €300 per person a day and ruled that no cheques can be cashed.

Overseas credit payments were limited to €5,000 and Cypriots travelling abroad can take only €1,000 with them.

Cypriots did not besiege the banks to try to withdraw their life savings because they knew that the capital controls prevented it.

Although people waited patiently outside banks across the Mediterranean island, feelings of anger and frustration were just below the surface.

There are deep fears that the country of 850,000 people is about to plunge into a deep recession, as people who have lost their savings drastically cut back on spending, the financial sector shrinks and businesses shed thousands of jobs.

The two worst hit lenders are Laiki Bank, which is to be dissolved, and Bank of Cyprus, which will have to absorb Laiki’s assets.

Laiki depositors face losses of up to 80 per cent on accounts above €100,000, while Bank of Cyprus savers have been warned they may lose 40 per cent of their savings above the €100,000 mark.

The closure of the banks for 10 days has caused huge problems for Cypriot businesses, which have been unable to make payments.

“I have to make a deposit so that I can make payments to my creditors,” said Petros Stylianides, 46, who owns an insurance broker company, as he lined up outside a branch of the Bank of Cyprus in the capital, Nicosia.

“I hope the bank will be safe. But then we thought everything was safe. It never crossed our minds that something like this would happen. People are cutting salaries, they are laying off a third of their staff. We are going to get into a downward spiral.”

Police were put on standby and 180 private security guards from G4S, the British company which was last year involved in a security debacle at the Olympics, were posted inside the banks but they were hardly necessary.

Many people were furious with the harsh terms of a €10bn bail-out agreed in Brussels earlier this week and felt that it had been driven by Germany’s determination to impose its brand of fiscal austerity on the fragile economies of southern Europe.

Angela Merkel, the German Chancellor, was the target of particular resentment.

“Merkel says every single Cypriot is guilty of dirty banking. But it is the Germans who should be ashamed for the greatest evil in the history of Europe – the Holocaust,” said a furious Cleri Machlouzarides, a chartered architect, outside a branch of Laiki Bank.

“Tell the bloody Nazis to go home. Germany should go and find someone their own size to pick on instead of trying to strangle us. Europeans should know it’s not going to stop here. “Luxembourg is next, then Spain, Portugal, Ireland.”

A 34-year-old businessman who runs a telecommunications company said he had been unable to pay his creditors for two weeks and had begged them to be patient.

“My fear is that they will drop me and take on a different partner company. I built the business up over six or seven years but it now it could be destroyed and I would have to start again from scratch,” said Miltos, who declined to give his surname.

The introduction of the capital control rules was unprecedented in the 14-year history of the euro.

The European Commission said the controls were legal and justified under EU law as long as they were temporary and proportionate.

They are supposed to be in place for just a week, but many analysts were sceptical.

In a Reuters poll of economists this week 30 out of 46 said the controls would last months, while 13 expected they would endure a matter of weeks. Three said they could last years. "This is a typical set of exchange control measures, more reminiscent of Latin America or Africa," said Bob Lyddon, the general secretary of the international banking association IBOS. "These are permanent controls until the economy recovers."

In a statement, the president of Cyprus, Nicos Anastasiades, thanked people for their patience, expressing his “warm gratitude and deep appreciation towards the Cypriot people for the maturity and spirit of responsibility they have shown at a critical time for the stability of the Cypriot economy.”

In a gesture of solidarity, the president announced that he had cut his salary by a quarter, while his cabinet ministers reduced their stipends by 20pc.

Cyprus banks reopen amid simmering tension - Telegraph

Cyprus waits for its 'giant leap back into the dark'

Helena Smith in Nicosia guardian.co.uk, Wednesday 27 March 2013 22.09 GMT

With the country's banks finally poised to reopen, there is anger and fear – but above all uncertainty

Cypriot flags during an anti-bailout rally outside the presidential palace in Nicosia, three days after the bailout deal was agreed. Photograph: Yannis Behrakis/Reuters

Small countries feel the onset of poverty quickly. In Cyprus, now poised to become one of the biggest experiments in global financial history, people know that penury is just around the corner.

Waiting for poverty to strike is no game. It makes ordinary men and women helpless, desperate and scared. "If you look at it mathematically, there is no way out: we will just never be able to repay our bills to the EU and IMF," said Haris Christou, one young Cypriot speaking for his compatriots. "Am I afraid? Of course I am afraid. Everybody knows everything in Cyprus is going to get bad, really bad. And nobody knows where exactly we are headed."

On Wednesday night men and women, some young, some old, gave voice to that fear. They gathered outside the offices of the European commission, and then lined the road that leads up to Cyprus's colonial-era presidential palace, to protest against a rescue programme that, wittingly or not, will destroy their country's banking sector and bring its economy to its knees.

"Out with the troika", "Fuck the troika", "Go home Troika", said the placards. "No to the policies of austerity." "No to privatisations." "No to the memorandum of catastrophe."

But more than words, or any amount of hoarse chanting, it is uncertainty that now speaks loudest in Cyprus. The uncertainty that has come with the knowledge that the island's economic output will shrink dramatically as a result of the austerity now being demanded in return for €10bn in aid. The uncertainty unleashed by policies that will see many Cypriots wake up with much less than they once had in the bank. And the insecurity of suddenly being the subject of capital controls that possibly could change Cypriots' lives for years.

"Countries don't normally go backwards," said Leda Georgiadou, a woman in her 50s. "With this rescue we have taken a giant leap back into the dark."

On Wednesday, the third day of Cyprus's status as a bailed-out nation, that leap came in the form of restrictions on the movement of money in and out of the divided island.

Anger is now not the only sentiment talking Cyprus. Greek Cypriots are more afraid than their cousins in austerity-whipped Greece because they know that what is heading their way is like nothing else to have hit Europe's southern periphery since the outbreak of the debt crisis.

The closure of the banks, which for the past 12 days has left streets, shops and restaurants eerily quiet – and thousands rushing to cash machines to withdraw money – was the first sign.

"In our case, the dogma of shock started on 15 March with the haircut," said Giorgos Doulouka of the communist Akel party, referring to the massive losses expected to be enforced on depositors holding over €100,000.

"People who bother to attend demonstrations are shocked and terrified, but I can assure you that those who stay at home are shocked and terrified, too."

In the race to prevent a mass capital flight from banks when they finally reopen on Thursday, the central bank has been working around the clock since the announcement of the €10bn aid deal to draw up measures that will stop money flooding out of the island.

At least half of the total €68bn (£58bn) currently deposited in Cyprus – in a banking system that until this week was at least eight times the size of the nation's economy – is held by Russians.

Among the items of emergency legislation being announced was a ban on cheques being cashed, a prohibition on anyone leaving the island with more than €3,000 in banknotes, and the imposition of a €5,000 upper limit on monthly credit card spending. Cash withdrawals have already been limited to €100 following revelations that the island's second largest lender, Laiki, would be shut down altogether.

Already dazed by the news that their once vibrant economy was a basket case – in poorer shape than even that of debt-stricken Greece – it is unclear how Cypriots will react to this latest bombshell.

In a bid to placate them, President Nicos Anastasiades's government has said that the emergency restrictions will be in place for no longer than seven days, to allow the island to come to terms with the fallout from the EU- and IMF-sponsored rescue deal.

"We are like an animal under experiment now," the former governor of Cyprus's central bank, Afxentis Afxentiou, told the Guardian. "I hope that no other country experiences [anything like] it … curtailing deposits has been like an earthquake," he said, lamenting the lack of solidarity shown to Cyprus by fellow eurozone states. "No one, including myself, expected the EU and ECB and IMF to behave in such a manner."

A man of a normally sunny disposition, like so many of his compatriots, Afxentiou admitted that his homeland is likely to feel the full impact of the plummeting living standards that will accompany recession for several years. But he drew strength from the knowledge that Greek Cypriots have been through dark times before – losing more than 70% of the island's resources when Turkey invaded in the wake of a coup aimed at uniting Cyprus with Greece in 1974.

"Forecasts in economy are a very dangerous thing," Afxentiou said. "But what I know is that we have lost everything before, almost all our resources, and rebuilt ourselves and our economy. We can do it again."

G4S on guard

Private security firm G4S, slammed for failing to provide enough security guards for the London Olympics, will dispatch 180 staff to all bank branches across the island in an attempt to ensure that the reopening goes smoothly. Their deployment will keep a lid on any possible trouble, said John Argyrou, managing director of the firm's Cypriot arm. "Our presence there will be for the comfort of both bank staff and clients, but police will also be present."

Argyrou didn't foresee any serious trouble once banks open because people had time to "digest" the extraordinary events of recent weeks. "There may be some isolated incidents, but it's in our culture to be civil and patient, so I don't expect anything serious," he said. A further 120 staff from G4S would be assigned money transport duties, Argyrou added. G4S staff have been working overnight to restock cash machines heavily used since branches were closed nearly a fortnight ago. This year G4S revealed that it had lost £88m over the Olympics fiasco, in which the company was unable to supply all the 10,400 guards it had promised. AP

Cyprus waits for its 'giant leap back into the dark' | World news | guardian.co.uk

Cyprus plans emergency restrictions on cash withdrawals before banks reopen

Jill Treanor The Guardian, Wednesday 27 March 2013 17.08 GMT

People leaving island can reportedly take only €3,000 in banknotes and spend up to €5,000 per month on credit cards

An empty ATM at Bank of Cyprus. The island is reportedly preparing emergency restrictions on cash withdrawals before banks reopen. Photograph: Milos Bicanski/Getty Images

Cyprus has made euro zone history by imposing swingeing measures to stop money flooding out of the country when its banks reopen after a 12-day hiatus  on Thursday.

After repeatedly delaying the reopening of the banking system, officials said banks would finally open at noon local time, raising concerns that customers will scramble to remove savings on which they could otherwise be facing losses of at least 40%.

Cash withdrawals from banks will be limited to €300 (£253) a day – although banks in recent days have been restricting withdrawals to €100 per customer to prevent them running out of cash while the country has negotiated its €10bn bailout.

Yiangos Demetriou, head of internal audit at the island's Central Bank, told the Cypriot state broadcaster that a limit of €5,000 would be set on the use of credit cards abroad and insisted the measures would be imposed for just four days.

Since the euro was launched in 1999, no member of the single currency has faced such emergency measures to keep cash within its borders. "The rationale is that these measures will be reviewed on a daily basis, so if there is the possibility of relaxing them we will," Demetriou said.

Bob Lyddon, the general secretary of IBOS, an international banking association, described the controls as "more reminiscent of Latin America or Africa". "These are permanent controls until the economy recovers," said Lyddon, casting doubt on any suggestion the capital controls could be temporary.

There were unconfirmed reports that anyone leaving the country – whose banking system had exploded in size to eight times the size of its €17bn economy – will be unable to carry more than €3,000 in banknotes, while families with members studying abroad would not be able to send more than €10,000 a term to relatives.

The security firm G4S is sending 180 staff to bank branches across the island to ensure calm when they reopen. It was reported on Wednesday that €5bn in banknotes had been flown in from Frankfurt by the European Central Bank (ECB).

Much could hinge on the reaction of wealthy Russians who have turned to Cyprus to make huge deposits in recent years. In the US, New York's powerful financial services industry has already benefited from a silent Cyprus bank run. "This past year, we've been seeing a shift in investments in the United States as a result of the financial state of the European Union," said Ed Mermelstein, a New York real estate lawyer who advises wealthy Russians.

Banks in Cyprus were closed 12 days ago shortly before president Nicos Anastasiades announced the terms of its bailout, which included skimming all savers to raise €5.8bn.

The terms have since been altered to ensure that those with less than €100,000 in their accounts are not forced to take a cut, in a move that the European authorities hope will restore faith in the bank guarantee scheme across the 27 EU nations.

Under the terms of the bailout with the EU, the ECB and the International Monetary Fund – known as the troika – the island's second biggest bank, Laiki, is to be closed down and savers with less than €100,000 transferred to Bank of Cyprus, the largest bank in the country.

Depositors with more than €100,000 in their accounts – the level at which savings are guaranteed across Europe – face a levy to raise billions of Euros towards the bailout. According to some estimates, this could be between 40% and 80%.

In Britain, the government has been working on ways to keep Laiki's four branches being "sucked" into the Cypriot bailout although there was little indication on Wednesday night that a solution had been found for the 13,000 customers potentially affected.

Chris Pavlou, former vice chairman of Laiki, told Channel 4 news that Anastasiades was given little option by the troika but to accept the draconian terms, which force savers to take a hit for the first time in the fifth bailout of a euro zone country.

Pavlou said: "It's not very nice, actually, to see two or three people half your age – clever people – coming over there and shaking their hands at the president and saying: 'You have to do this, otherwise we bring you down.' It is very painful for someone who's just been elected to actually face that."

But the meltdown of the Cypriot financial system came as no surprise to well-connected, wealthy Russians, who bundled some of their money to the US. "Many of our clients had a heads-up on this issue," said Mermelstein. "Cyprus had started having the conversations about what it was intending, and that's been going on for half a year."

Michalis Sarris, the Cypriot finance minister, has admitted that Cypriot banks were suffering "substantial outflows" for weeks before the meltdown, indicating that Russians were already anticipating the crisis.

According to investment bankers, lawyers and wealth advisers in the US, Russians have been seeking property developments in the US over the past year. Lawyers and advisers have been making construction loans and sinking money into the concrete foundations of the big real-estate developments in Manhattan.

Six months ago, Mermelstein said, a Russian client took several million dollars from a Cyprus account and made a loan to a commercial project in New York.

After Cyprus announced an overnight bank raid into the deposits of rich customers, Mermelstein said his client "was happy the loan came out of Cyprus and doesn't have to go back any time soon". Such investments, ranging in size from $5m to $25m, have "gone up substantially", the real estate lawyer said.

With ink on the Cypriot bailout barely dry, the focus was turning to which countries might face the same fate, following Greece, Ireland, Portugal and Spain.

James Howat, European economist at Capital Economics, said: "Cyprus has shown that even the smallest members of the euro zone can rock the single currency area.

"Slovenia is probably the next country most likely to be forced into a bailout programme, but Malta and Luxembourg are also vulnerable given the size of their banking sectors relative to their economies.

"There is already evidence of market stress in Slovenia, with government bond yields rising from 4.5% to 6.5% over the last two weeks."

Analysts at Fathom Research said that the relief surrounding the Cyprus deal would be temporary. "The relief is misplaced and will be short-lived, since the 'doom-loop' undermining the euro – between insolvent banks and their indebted sovereigns – has not been broken, but emphatically reaffirmed."

Cyprus plans emergency restrictions on cash withdrawals before banks reopen | World news | The Guardian

This is all about saving the euro, not Cyprus

By Nigel Farage 8:57PM GMT 25 Mar 2013

There is a glimmer of hope – and that is the Cypriots’ desire to reassert independence

Banks in Cyprus have been closed while their fate is decided in Brussels Photo: AFP/GETTY

The brinkmanship that has been on display over the Cypriot financial crisis makes obvious to all but the wilfully blind the level of political determination in Brussels to save the euro at all costs. No amount of empirical economic evidence – or misery for ordinary people – matters when the dreams of the continent’s elite are threatened.

After the French and Dutch rejected the European Constitution in 2005, the then European Commissioner for Communications, Margot Wallström, put it perfectly. She and the other EU cheerleaders had invested “a lot of energy and political capital” in the project, she declared, and they were not going to give up on it. No matter what the people said, no matter what the economic realities were.

Five years later, this delusion in the face of brute reality has reached its apogee in Cyprus.

How can it be that the German parliament gets to vote on the wholesale theft of money from richer Cypriot depositors, while the Cypriot parliament has no such voice? Instead the theft is labelled “restructuring” – and as such there will be no Cypriot democratic oversight of the economic rape of their country. Be under no illusion: this is being done not to solve the Cypriot economy, but to save the euro. The crashing irony is that, in their February elections, the Cypriots threw out the Communists. One could ask why they bothered.

But at what cost is the euro being saved? What we can see here is an almost deliberate attempt to set the people of Cyprus against each other. By restricting the damage to those who have deposited 100,000 Euros in the bank (rather than across the board, as was the previous suggestion) they will be undermining social cohesion, pitting those with against those without. It destroys any pretence that the EU has at its heart a belief in democracy, or in those warm words so often repeated about it being the guardian of essential “European” qualities. In truth it was only a fair-weather friend and its behaviour in this storm, as in others, is to drop these benevolent ideas like hot stones.

Worse still, Jeroen Dijsselbloem, the Dutchman who heads the Euro group of euro zone finance ministers, has made it clear that this is now the template for all euro zone countries. Think about that for a moment. These politicians really believe that all the money in the euro zone is actually theirs – as if people have it on sufferance, and not by rights. Since Dijsselbloem spoke, bank shares in Spain, France and Italy have collapsed: citizens of these countries not unreasonably fear the worst.

All this is done for the European elite’s devious ends. One of which is the so-called “Target 2”. This is the euro zone bank clearing system, by which private transfers of money from one member to another are cleared through the national central banks. If, for instance, 100 Euros is moved from a Greek bank deposit to a German bank deposit, the Greek central bank ends up owing another 100 Euros to the Bundesbank (through the European Central Bank).

At present, the Bundesbank is owed 600 billion Euros thanks to Target 2, mainly as a result of capital flight from Mediterranean countries. But, unlike with normal debts, the debtor countries have no contract or understanding about how this should be repaid.

Cyprus has just been granted a 10 billion euro bail-out loan from the other euro zone countries. But the irony is that Cyprus is already in receipt of a bail-out worth 7.5 billion Euros – this is the Target 2 debt of the central bank of Cyprus. And they are desperately trying to prevent this growing as a result of further capital flight.

Perhaps this is the most ominous result of the Cyprus debacle. While the details of the controls to prevent money leaving Cyprus are not yet known, they will quickly lead to Euros in a bank account there being worth less than Euros in bank accounts elsewhere.

I have been saying this since the start of the latest chapter of the crisis: that the level of risk and the prospects of contagion are such that those who have deposits in other southern European countries should get them out as soon as possible. Don’t just take my word for it. The economist and journalist Anatole Kaletsky yesterday made his support for my comments utterly clear on Twitter: “Anyone with more than 100,000 Euros in a French, Spanish or Italian bank is crazy if individual, or criminally negligent if a company director.”

There is, however, a silver lining to all of this – a small one, but possibly the most important aspect in the whole sorry debacle. Cyprus is different from Greece, different from Ireland and different from Spain and Italy. In Cyprus we have a population that would prefer to leave the euro zone than comply with the privations of Germany and Brussels. We have a parliament that has already voted down one scheme, and is thus barred from debating this one. We have a Cypriot archbishop who supports his people rather than the EU. They are not happy and they are pointing to a new reality.

That David Cameron is welcoming these plans shows how far the British political class is from any ideals of democracy, accountability and liberty. Instead the future to him is a technocratic, post-democratic world, run in the most part by unelected, fanatical and deluded power-mongers in Brussels and Frankfurt.

Nigel Farage is the leader of Ukip

This is all about saving the euro, not Cyprus - Telegraph

Cyprus bailout: deeply flawed – but a best effort in desperate times

 

Larry Elliott, economics editor guardian.co.uk, Monday 25 March 2013 10.32 GMT

The deal at least removes immediate risks of a banking collapse, but chances of a further bailout and Russian fallout are high

The Cyprus bailout will be overshadowed by serious knock-on effects, but is probably the best possible deal after initial terms were rejected by parliament. Photograph: ZUMA/Rex Features

The bailout deal for Cyprus is deeply flawed. Some analysts say it is even worse than the original plan announced just over a week ago.

For sure, it will have serious knock-on effects, some of which will only become apparent over the coming weeks, months and years.

But it was probably the best that could be achieved in the desperate circumstances that followed the rejection of the original terms by the Cypriot parliament last week. And it has removed the immediate risk of a banking collapse and exit from the single currency.

The new proposal removes the most objectionable aspect of the first package – the levy on all depositors – making it less politically toxic. Money will instead be raised from rich depositors – those with savings of above €100,000 – and bondholders.

By raising money from the better off – many of them Russian – Cyprus will get €10bn from the troika (the European Union, the European Central Bank and the International Monetary Fund).

The threat that the ECB would stop providing day-to-day support for the Cypriot banking system has been lifted. That should ensure that the banks can reopen later this week, and means there is no immediate risk of Cyprus going bust and leaving the single currency in a disorderly manner.

Markets saw this as the doomsday option and rallied after the agreement was reached in Brussels in the early hours of Monday.

The shakiest of the Cypriot banks – Laiki – will be closed. Deposits of more than €100,000 – amounting to €4.2bn in all – will be placed in a "bad bank". That means savers will only get a fraction of their savings back and the deposits could, in theory, be lost entirely.

Smaller deposit holders at Laiki will be transferred to the Bank of Cyprus, which will need serious recapitalisation, not least because it inherits Laiki's €9bn debt to the ECB. Money for that will come from Bank of Cyprus's own wealthy deposit holders. These changes, it is hoped, will avoid a run on the banks when they reopen for business.

This, though, is certainly not the end of the story. For a start, Cyprus faces a bleak economic future in which the need for a second bailout looks a strong probability. It is not just that the country's economic model has been destroyed. Nor is it simply that a brutal austerity programme is the condition for the €10bn loan.

These will both hurt, but be compounded by a ferocious credit crunch as the banks seek to shore up their balance sheets by lending less and at higher rates of interest. The risk is of a full-scale economic collapse that will result in Cyprus having a debt problem worse than that in Greece.

Although eurozone politicians say otherwise, what has happened in Cyprus will have ramifications for the rest of the single currency.

For a start, any depositor with more than €100,000 in, say, an Italian or Spanish bank, will wake up this morning wondering whether to move it somewhere safer. And in the event that speculation did start to mount about the need for a bailout in another member of the eurozone, those with deposits of less than €100,000 would recall what happened in Cyprus. The risks of a future bank run have increased.

Finally, the Russians who have a total of €20bn stashed away in Cypriot banks are going to be caned by the bailout deal. The chances of retaliation against the eurozone by the Kremlin over the coming months are high.

Cyprus bailout: deeply flawed – but a best effort in desperate times | Business | guardian.co.uk

Cyprus bailout deal: at a glance

Hilary Osborne and Josephine Moulds The Guardian, Monday 25 March 2013 18.38 GMT

The essential points of the deal, including the closure of Laiki Bank, and what this means for savers and the euro zone

Customers withdraw money from Bank of Cyprus cash machines in Nicosia. Photograph: Katia Christodoulou/EPA

Cyprus struck a last-minute bailout deal in the early hours of Monday morning, aimed at preventing the island becoming the first country forced out of the single European currency.

• Crucially, the new programme spares deposits below €100,000 (£85,500), unlike last week's proposals, which sparked outrage with a 6.75% tax on all bank depositors.

• Cyprus's second-largest bank, Laiki Bank will be closed. Its €4.2bn in deposits over €100,000 will be placed in a "bad bank", meaning they could be wiped out entirely. Those with smaller deposits at Laiki will see their accounts transferred to the Bank of Cyprus.

All lenders to Laiki will see their investments wiped out, in a first for a euro zone bailout. In other bailouts, holders of higher-rated bonds have not faced such losses.

• Bank of Cyprus survives the axe, but faces huge restructuring. No bailout money will be used to recapitalise the bank. Instead its shareholders and bondholders will be hit. It is thought depositors with over €100,000 at the bank will also be involved in the recapitalisation and face losses of around 30%.

Getting the bank up to healthy EU-mandated capital levels will be made harder by the fact that Bank of Cyprus will inherit a €9bn debt Laiki had with the European Central Bank.

Is my money safe in a UK branch of Laiki Bank?

The bank is saying it is "business as usual" for individuals and companies with money in its four UK branches.

It says its customers will not be transferred to Bank of Cyprus, even though it set up as a branch rather than a subsidiary. It is not restricting withdrawals and says customers should not panic.

But what if the bank had to close?

Customers are covered by the Cyprus deposit protection scheme up to €100,000. Laiki Bank UK is in talks with the Bank of England and Financial Services Authority about the status of savers with more.

What about Bank of Cyprus customers in the UK?

Bank of Cyprus's UK operation is a separate entity, incorporated in the UK, so customers are unaffected by any of the arrangements made in Cyprus. Customers are covered by the UK's Financial Services Compensation Scheme, so if anything did get wrong they would get the first £85,000 of their holdings returned, possibly within days.

How does the deal differ from the one on the table last week?

Two key differences: first, small depositors have been protected – with the EU's €100,000 legal guarantee upheld. Second, the plan does not have to be approved by the Cypriot parliament because losses on large depositors will be achieved by restructuring Cyprus's two largest banks and not by levying a "tax" on its citizens.

Who are the biggest losers?

Russian nationals are estimated to hold more than €20bn of the €68bn deposited in Cypriot banks and many have deposits over €100,000.

Laiki Bank was 84% owned by the Cypriot government, following a €1.8bn bailout in June last year. The rest is owned by private and institutional investors, including bank staff.

Laiki bondholders will be wiped out and lenders to the Bank of Cyprus will face heavy losses in the recapitalisation.

Thousands of staff at both Laiki and the Bank of Cyprus will lose their jobs.

What will happen when the banks open in Cyprus?

There will still be very tough restrictions on bank account access and the movement of cash out of Cyprus, to help prevent a bank run. The European commission said these capital controls will only be enacted "exceptionally and temporarily", as requested by the Cypriot authorities.

The fear is that Cypriot savers will be sufficiently worried by the past week's events that, when they are finally allowed to, they will take their money out regardless of the guarantee that deposits up to €100,000 are safe.

Will this be the end of Cyprus's problems?

No. In fact, analysts say it is only the beginning. Cyprus has benefited for years from attracting the deposits of wealthy individuals from around the euro zone. That business model is now broken and the country has nothing to replace it with. Tellingly, the EU gave no economic projections for Cyprus in its statement.

Gary Jenkins of Swordfish Research said: "The economy is crushed for the next God knows how many years. As soon as people can take their money out the banks, they will take it out. Confidence has disappeared. Who's going to want to do business with Cypriot corporate right now?"

Will Cyprus need another bailout?

Possibly. The €10bn bailout raises Cyprus's debt to around 143% of GDP. With GDP likely to fall dramatically over the next few years, that ratio could start to look even more perilous.

A deal to restructure Cyprus's debt by hitting private bondholders would go against EU promises that the Greek deal of that kind was an exception.

All of which prompts analysts at UBS to suggest Cyprus's euro zone partners might have to get involved again some time in the future. They write: "In other words, we see a risk that this bailout for Cyprus might not have been the last one."

Will this be the model for future bailouts?

It is impossible to say. So far, no two euro zone bailouts have been the same. Policymakers appear to react to events, rather than follow a fixed plan. The danger is that no one is paying attention to the unintended consequences.

What could the unintended consequences of this particular plan be?

With their initial plan to tax all depositors, policymakers made it clear that they would, in certain circumstances, be prepared to take that money. Even though they did not go through with it, this will likely shake confidence in the banks if the financial crisis re-escalates in other countries, such as Spain or Italy.

Meanwhile, larger depositors and foreign companies with money in Spain and Italy are likely to start shifting that elsewhere, fearing that the Cyprus deal will be a model for future bailouts, further damaging already weak financial institutions.

Cyprus bailout deal: at a glance | Business | The Guardian

The postmortem on the Cyprus crisis will be ugly

 

Nils Pratley The Guardian, Friday 22 March 2013 20.51 GMT

The handling of the crisis has been farcical, and has undermined confidence in Berlin's and Brussels' firefighting skills

Protesters outside parliament in Nicosia. The cabinet was set to approve a 'Plan B' bailout deal with the EU and IMF. Photograph: Patrick Baz/AFP

• Assume the crisis in Cyprus is patched up this weekend or on Monday – it is still the way to bet because both sides have too much to lose. After its struggles in Athens and elsewhere, the eurogroup surely won't let a member of the single currency fall out for the sake of a few billion euros.

Equally, the Cypriot government must know what a hole it is in. There is no salvation from Russia; and, by threatening to cut off liquidity from the country's stricken banks, the European Central Bank has put its credibility on the line. The main ingredients are all there for another serving of euro fudge.

But what would come next? For Cyprus, the immediate future is bleak. In effect, Germany is telling the country to find a new occupation. Bloated offshore banking, with a speciality in Russian deposits, doesn't fit the shiny new euro model of banking union. Try tourism, perhaps. Cypriots might complain these rules were not made clear when they joined the euro only five years ago. They'd be right. But their best strategy today is to stay within the club and, like Greece, try to negotiate better terms another day.

It's the reaction outside Cyprus that matters for the future of the euro. Investors' postmortem on the mess could be dangerous. Two points will stand out:

First, the handling of the crisis has been farcical, and has undermined confidence in Berlin's and Brussels' firefighting skills. Woe in Nicosia was inevitable once the last Greek restructuring whacked bondholders, including Cypriot banks.

Yet, with ample time for all sides to prepare, the banks have been closed for a week and the negotiations are going down to the wire. True, Cypriot politics aren't easy. But next time it might be Italian politics.

Second, confidence has been shattered in the notion that eurozone depositors with less than €100,000 are sacrosanct. Under plan A the eurogroup was prepared to trample on the one principle that was understood across the continent.

There's no knowing the damage that will do. And how will bigger depositors in Spanish and Italian banks react? If their instinct is to seek safety elsewhere, a lot more trouble is in store.

• It is now government policy that house prices must not be allowed to fall. That is the main lesson to be drawn from George Osborne's Help to Buy scheme, which is really an adventure into sub-prime lending. If you can't meet a bank's demands for a deposit the government will help to bridge the gap by giving a guarantee for up to 20% of the mortgage on homes worth up to £600,000.

Pitched as an appeal to an "aspiration nation," this policy is partly born of the terror of offending the constituency called current homeowners. The most logical way to cure Britain's housing shortage would be to order the construction of more homes, let's say a million. But an increase in supply of that order would, in the absence of meaningful growth in wages and affordability, cause the value of the current houses to fall. Great for first-time buyers; not so good for attracting the votes of established owners.

A serious fall in house prices would also risk creating a fresh round of provisions at major banks and mortgage providers.

To date, lenders have escaped big residential-related losses because house prices have not collapsed. Since the peak the fall has been about 15% in real terms; the banks' big UK losses on property lending have mostly been on the commercial side. But another fall of 15% would cause heavy provisions.

Thus Help to Buy is deemed the best policy in the locker if something must be done to make homes affordable for those without sufficient savings. In the short-term the dangers are probably not severe, especially if the government really is determined to liberalise planning laws (though believe that when you see it) and if it can exclude remortgaging and second homes from the subsidies (technically tricky, to judge by ministers' wishy-washy statements).

In the long term though, creating government-backed mortgages to encourage high loan-to-value lending is plainly irresponsible. It risks an almighty crash on the day, admittedly far off, when interest rates rise.

"Had we been asked to design a policy that would guarantee maximum damage to the UK's long-term growth prospects and its fragile credit rating, this would be it," concluded thinktank Fathom Consulting. Fair comment.

• Last July Peter Marks, chief executive of the Co-op, pledged to mount "a real challenge to the status quo" in the banking world. He had just secured an agreement to buy 632 branches from Lloyds at what appeared to be the knock-down price of £350m; Lloyds even agreed to underwrite the debt to fund the deal.

Eight months on, Marks' real challenge is getting the deal out of the starting gate. "We're trying to conclude this transaction in very difficult economic times," said Marks. "That's what makes it more difficult. We're trying to establish what the risks are and to mitigate those risks."

Put like that, it sounds as if Co-op is not remotely close to being able to sign on the dotted line. Instead, it seems to be struggling to raise the capital – perhaps as much as £1bn is needed – to support a bigger banking operation. The life and savings business was sold this week, freeing up £200m, and general insurance is now on the block.

Is this prize really worth the hassle? The Co-op is still digesting the Britannia Building Society, which was blamed for £370m of bad loan losses this week. Then there was £150m for PPI mis-selling and the same again for a writedown of the value of the IT systems. Add up that little collection, plus the decline in profits from the "core" banking operation, and the unit recorded a loss of £662m. The capital position is healthy but this does not look like a business capable of integrating those branches very soon.

Marks is retiring in May, to be succeeded by ex-B&Q man Euan Sutherland. The handover gives Co-op members the ideal opportunity to demand a review of the Lloyds plan. Ambition is a fine thing; over-ambition is not.

• As Warren East announced his departure after 12 years as chief executive, there was a reminder of ARM Holdings' stunning achievement: 95% of the world's smartphones contain microchips designed by ARM and the company is now worth £13bn. Great stuff, and a phenomenal investment for anyone who bought the shares at almost any point in the last decade.

But the highest point for the shares was actually in 2000 when the price, albeit briefly, topped £10. Don't blame ARM, which has done nothing wrong: pre-tax profits have risen from £35m to £276m since the turn of the century.

It was the madness of the dotcom era stock market, pricing ARM as if global domination had already been achieved. What were investors smoking back then?

The postmortem on the Cyprus crisis will be ugly | Nils Pratley | Business | The Guardian

Cyprus: deserted island

Editorial The Guardian, Friday 22 March 2013 22.17 GMT

Four and a half years ago, the American Treasury secretary was worn down by rescuing reckless institutions, and so decided to get tough with one. Its name was Lehman Brothers

Four and a half years ago, the American Treasury secretary Hank Paulson was worn down by rescuing reckless institutions, and so decided to get tough with one. Its name was Lehman Brothers, and the world is still living with the consequences. The problem was not that his concerns about indulging companies that took dangerous risks were silly; they were well founded. No, the problem was that in his impatience to impose some discipline on an unruly system, he lost sight of the reality that all financial order is based upon the foundation of the banks being able to honour their debts. Watching Europe's bumbling response to the crisis in Cyprus this week, it has felt as if the lessons of 2008, or something very like them, are having to be learned over again.

Since Lehman, we've grown familiar with the phrase "too big to fail". In responding to a small island, a mere quarter-percent drop in the euro zone ocean, the continent's institutions initially acted as if following a dangerous corollary – too small to care. There are disputes about whether President Nicos Anastasiades was following orders, in proposing to rescue banks by helping himself to a chunk of every deposit within them, including those below €100,000 which Europe had previously sworn would be safe everywhere. But even if the idea had a Cypriot genesis, Brussels and Frankfurt should have known that the Cypriot people would never wear it, and yet the plan was pushed all the way to parliament in Nicosia where, attracting zero support, it collapsed and died. Once again, in connection with a currency supposed to bind a continent together, the democratic will of a southern nation has been considered as an afterthought. Far too late, it was remembered that all economic arrangements rely on consent, but at least a scrap of the trust has now been rescued by the apparent shared understanding that any levy will now respect that promised €100,000 guarantee.

The crucial question, however, is whether the scrambled rethink this weekend will be bold enough. On Cyprus's part, capital controls are reportedly under consideration, an extraordinary departure within a single currency zone. As with Mr Paulson's reluctance to stand behind Lehman's dodgy dealings, the reluctance of the Germans to stand behind stricken Cypriot financial institutions is understandable: they have grown bloated; they have acted imprudently; they have relied too much on funds from Russian tax-dodgers, whom bizarrely the Russian state has been defending all week. German politicians are doing no more than respecting the will of their own people in trying to ensure that all this does not go unpunished. But again, as with Mr Paulson, they need to stop and do a commonsensical check on the consequences of being bloody-minded about extracting a price – in this case €6bn – which could soon look paltry in the scale of things.

For if the doors of Cypriot banks were to open on Monday without this thing being resolved, Europe as a whole should wake up scared: for panic can be contagious. If the consequence, as is possible, were the island to slip out of the euro and Cypriot pounds being printed, then the spell of the single currency's permanence would be broken for good. The consequences would even go beyond Europe. Since 1970, of 147 banking crises tracked by the IMF, none have imposed a blanket loss on all depositors. The next year, Richard Nixon broke the dollar's link to gold, since when the value of money has been underpinned by nothing but the word of government. We live with the uncomfortable truth that there is never enough money in the vaults to pay every depositor, largely because we trust the authorities to see to it that – when the pinch comes – the cash would be there. That promise may only ever have been implicit, but it does not follow that there would not be grave consequences from the world seeing that it can be broken.

Cyprus: deserted island | Editorial | Comment is free | The Guardian

Greek Lagarde List journalist prepared to go to jail

 

By Alex Spillius 9:00PM GMT 21 Mar 2013

A Greek investigative journalist prosecuted by his government for publishing a list of wealthy Greeks with Swiss bank accounts has said he was prepared to go to prison for the offence.

Greek investigative journalist Kostas Vaxevanis (C) leaves a prosecutor's office in Athens in 2012. He was found not guilty of breaking data privacy laws in November, but the Athens public prosecutor subsequently ordered a retrial for June Photo: REUTERS

Speaking before receiving the Journalism prize at the Index on Censorship Freedom of Expression in London, Kostas Vaxevanis said it had been his duty to publish the list in defiance of the Greek establishment.

Kirsty Hughes, the Index’s chief executive officer, said: 'Kostas has stood up to an economic and political elite who want to close down debate on one of the biggest crises in Europe’s history.’

Other prizes went to Pakistani schoolgirl Malala Yousafzai, Palestinian-born Syrian internet activist Bassel Khartabil and South African photographer Zanele Muholi.

Mr Vaxevanis’s case caused uproar in Greece and internationally. He was found not guilty of breaking data privacy laws in November, but the Athens public prosecutor subsequently ordered a retrial for June.

Speaking ahead of the awards ceremony, Mr Vaxevanis said he would be prepared to go to jail “just to show people what is happening in Greece”.

 

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“But if I am convicted answers will have to be given about why other magazines and websites who published the list were not prosecuted,” he said.

A dozen other media outlets reprinted the list from his magazine Hot Doc, but none have been charged.

The maximum sentence he faces for breaching privacy laws is 10 years.

He continued: “I would publish again, of course, if there was a need. There had been talk about the Lagarde List for three years and it was my duty to publish.”

Three consecutive governments had known about the list but failed to act.

The list is in fact a spreadsheet containing 2,062 potential tax evaders with undeclared accounts at Swiss HSBC bank’s Geneva branch.

It is named after the former French finance minister Christine Lagarde, who passed the information on to Greek officials in the autumn of 2010 to help them crack down on tax evasion.

After receiving the information anonymously, on a USB stick, Mr Vaxevanis published a list of account holders, omitting large amounts of financial information in the files.

The next day he was arrested in the middle of giving a radio interview.

He said his case showed that Greece’s dire financial crisis has made the lack of democracy in his country more acute. In response to the outcry, the new coalition government has done nothing more than form a parliamentary committee of inquiry.

Mr Vaxevanis said he and his magazine were targeted, he said, because they were small and independently owned and could not be leaned on.

“I am just being punished for telling the truth. It’s an act of revenge because I broke the ties between political power and the media, which are very close in Greece,” he said.

Greek Lagarde List journalist prepared to go to jail - Telegraph

Cyprus bailout crisis: panic replaces anger as bankruptcy looms

 

Helena Smith in Nicosia The Guardian, Thursday 21 March 2013 20.11 GMT

Locals speak of situation worsening 'by the hour' in descent far more rapid than Greece's

Cypriots queue outside a branch of the Laiki bank in Nicosia. Photograph: Katia Christodoulou/EPA

'It's worse than a war. At least in a war you know who your enemies are," said Thanassis Iracleous, standing behind a till as he discussed the escalating crisis in Cyprus. "On Friday they were our friends," railed the pharmacist, whispering the word "German" in the same breath. "The very next morning they were suddenly our enemies."

As wars go, the bespectacled Greek Cypriot is having a good one. Relatively speaking. On Thursday, six days into the island nation's worst economic debacle in decades, Iracleous was still accepting credit cards and customers were still walking through the doors of the chemist he runs in the heart of Nicosia. But it is not clear how long he will be able to keep this up.

That is more than can be said for most retailers in Cyprus, the latest frontline in the euro zone's ever bloody conflict of sovereignty and debt. With the country's solvency hanging by a thread in the wake of the Cypriot parliament's overwhelming rejection of the tough terms attached to financial rescue from the EU and IMF, panic has gradually replaced anger and the shock born of the brutal realisation that bankruptcy is no longer an abstract concept.

"Today, suppliers began demanding payments in cash," said Iracleous, shaking his head incredulously. "Almost no one is accepting credit cards or cheques any more because everyone is saying that come Tuesday the game will be over. Our banks will have closed."

Societies fending off default descend into chaos by stages. Poverty hit Greece after successive rounds of austerity. Over the course of three years of tumult and despair, helplessness followed hopelessness.

In Cyprus, the former British colony that prided itself on its spectacular economic recovery nearly 40 years after Turkey invaded and seized the island's northern third, the descent has been more dramatic for being faster still. Locals speak of a situation worsening "by the hour". In towns across the island's southern sector, the panic spawned by uncertainty was underscored on Thursday by the long queues outside banks as fearful depositors rushed to withdraw cash from ATMs. "The radios, today, were full of talk that next week Laiki may not exist," said Kypros Kyprianou, standing patiently in line outside a branch of the bank on Diogheni Akritas, one of the capital's major avenues. "I'm waiting here till I get my cash," he continued.

"On Saturday, ATMs were giving out €800. Now you can't get more than €400 and already I've been in line for over a hour because the machine is only dispensing €40 at a time."

A 38-year-old carpenter, Kyprianou is proud that all 56 of Cyprus's MPs resoundingly rejected the bailout deal which, in an unprecedented step, stipulated that ordinary depositors pay part of the bill. "We are not like the Greeks who just sign up to whatever these people [the EU and IMF] dictate," he boasted. "We can say no."

But ever since the eruption of this latest stage of the crisis, the carpenter has been out of work. "There is no liquidity. The market has dried up. I was meant to get a deposit for a big project on a house on Saturday and it just fell through," he said, "just like that."

Vassos Pratziotis, a graphic designer who like Kyprianou is now withdrawing cash on a daily basis, says what is most worrying is that nobody knows what the future will bring. "There can't not be a solution," he said, drawing on a cigarette. "The problem is we have no idea what it is going to be. I'm very afraid that Laiki will collapse because the bank is my firm's main client and for several months we haven't been paid."

Food shortages are not in evidence. But in a worrying sign on Thursday major chains reported that suppliers were beginning to reduce produce and even withhold goods if payments weren't made in cash. "Many are insisting that we pay up front," said Andriana Anisia, manager of a branch of the local supermarket co-operative Green Tree. "People are clearly panicking. Today, our milk supplies came and they were inexplicably thinner. Who knows what next week will bring?"

Britons who have retired to the island are also expressing alarm. In Nicosia many could be spotted similarly rushing to banks to cancel transfers of their pensions from the UK. "Our biggest worry is that the whole banking system is going to collapse, not just one or two banks," said one, Francis Colley. "I called my pension fund and they said they are very concerned about the situation in Cyprus. Very, very concerned."

The streets of Nicosia have fallen eerily quiet with the intensification of the showdown. Uncertainty over the financial lifeline is such that no one has much appetite for anything, locals say. "Even if you have work, your mind is somewhere else," said Pratziotis. "Everyone is numb, really, with worry."

In his pharmacy, Iracleous, like many Greek Cypriots, laid the blame squarely with Berlin. "It's very simple. It's all about money," he said. "In this case Germany wanting to control the Russian oligarchs who have invested in our banks. If they leave Cyprus, which is what Merkel wants them to do, they will have to go somewhere else. Germany will be the top of that list. What we in Cyprus have learned is that you have to be very careful of your friends."

Cyprus bailout crisis: panic replaces anger as bankruptcy looms | World news | The Guardian

The fatal flaw in the eurozone's not-so-cunning plan for Cyprus

 

Larry Elliott, economics editor The Guardian Tuesday 19 March 2013 19.20 GMT

Either Europe or the IMF give Cyprus more money – or Germany and the other hardliners insist the deal is non-negotiable, in which case the banks will go bust

The notion Cyprus’s parliament would reject the bailout proposal was not factored in to what was likened to one of Baldrick’s ‘cunning plans’ in Blackadder. Photograph: AP

It must have seemed so simple for the politicians and officials who pieced together the bailout plan for Cyprus announced last weekend.

One of the smaller eurozone countries, Cyprus had become the money-laundering centre of choice for Russian oligarchs and there was no way Angela Merkel was going to agree to a blueprint that would see German taxpayers subsidising Moscow billionaires, especially with an election looming this autumn.

So bank depositors in Cyprus would be obliged to pony up one euro for every two provided by the European Union and the International Monetary Fund, with the levy imposed across the board. Cyprus was a special case, it was insisted, and therefore there would be no knockon effects to the rest of the eurozone.

The notion that the Cypriot parliament would reject the proposal was not factored into the calculations, a fatal flaw in what one City analyst compared to one of the "cunning plans" conjured up by Baldrick in the Blackadder series.

Other commentators were less inclined to see the funny side of what was clearly an escalating crisis. One said it was the opening of Pandora's Box; another saw events in the eastern Mediterranean country as the equivalent of the assassination of archduke Franz Ferdinand in Sarajevo.

So what happens next? Forget some of the more far-fetched scenarios. Cypriot MPs voted down the idea of a tax on bank deposits as a condition of a bailout on Tuesday night and they are unlikely to have a crash re-think given the public fury at the raid on their savings. Russian president Vladimir Putin is not going to come to the rescue with some cash from the Kremlin – though there are rumours that state-controlled energy company Gazprom might rescue the most troubled bank in return for seizing control of the island's potentially lucrative gas reserves. But this is not one of the times when Europe can kick the can down the road, hoping all will be well in time.

Instead, there are really only two plausible scenarios: somebody – be it Europe or the IMF – gives Cyprus more money, in which case there is a chance that the crisis can be contained. Or Germany and the other hardline eurozone countries can insist that the deal is non-negotiable. In which case, the banks in Cyprus will go bust, risking widespread turmoil.

Given the precarious eurozone economy and the enfeebled state of European banks, cutting Cyprus a better deal looks like the safer option. The package could be restructured so that only deposits in excess of €100,000 (£85,000) are taxed, the preferred option of Christine Lagarde at the IMF. Sparing those with savings of less than €100,000 from any pain would require the bigger depositors to pay a 15.5% tax to find the €5.8bn demanded of Cyprus. Alternatively, Europe could easily find the extra €5.8bn itself.

The problem is that both options will cause political problems. Putin will bridle at suggestions that Russian citizens – who make up a large proportion of the €100,000 depositors – should be singled out. And Merkel could expect an almighty domestic backlash if she backtracked from the tough stance she adopted at the weekend.

But the alternative is to let the banks in Cyprus go bust as soon as they are reopened after the extended bank holiday and hope that it really is a "special case". That looks like an awfully big gamble.

The fatal flaw in the eurozone's not-so-cunning plan for Cyprus | Larry Elliott | Business | The Guardian

Why we should be cautious about cheering on Cyprus's no vote

 

Nikos Chrysoloras The Guardian, Wednesday 20 March 2013 15.35 GMT

The main demand of this week's 'parliamentary revolt' was that Cyprus remain an offshore tax haven

Cypriots protest outside the parliament in Nicosia. Photograph: Patrick Bazpatrick/AFP/Getty Images

Watching the drama unfolding in Cyprus over the last few days has been anything if not surreal. The far left and the Eurosceptic right alike have rejoiced at the Cypriot parliament's "valiant no" to a deal that would have ensured the financing of the cash-strapped economy from the eurozone and the IMF.

The detail they seem to miss is that Cypriots did not reject harsh austerity measures. These measures had already been agreed by the previous – supposedly communist – government of the island, and were approved by the current administration. It did not even revolt against an unjust levy on retail deposits. The eurozone had already signalled its agreement to spare small savers, on condition that assets belonging to foreign oligarchs and tycoons were subjected to a significant haircut (15.6%).

Indeed, it was the Cypriot government that rejected this option, in a dramatic 10-hour meeting of eurozone finance ministers last Friday, because it would damage the sprawling financial sector of the country. So the main demand of this "parliamentary revolt" was that Cyprus remain an offshore haven. In exchange, the Cypriot government seemed willing to offer so many concessions to Moscow as to effectively turn the island into a Russian overseas territory. Why anyone would celebrate this development is not clear.

In Brussels, meanwhile, the people managing the world's second largest economy showed once again a ridiculous lack of leadership. First, they concluded and defended a deal that would violate the sanctity of retail deposits. When the catastrophic consequences of this were pointed out to them, they started pointing the finger at one another. When they decided to backtrack, it was already too late.

It is true that the deal has so far caused chaos only in Cyprus – a small country that, according to Berlin, is "not systemically important". But markets and people know already that next time there is a crisis in Italy, Spain or elsewhere, the eurozone is willing to cross the Rubicon. This is a disaster of unimaginable proportions.

All this should not come as a surprise to anyone who follows the Brussels bubble. Suffice to say that the only reason that Jeroen Dijsselbloem was chosen to run the all-powerful Eurogroup (the council of finance ministers of the eurozone), is not his expertise, nor his ministerial experience, but the fact that he is Dutch. All other, more reliable, options were excluded because of their nationality.

So, how could the Cypriot crisis have been resolved? First of all, by allowing a bit more time: there was no reason whatsoever to ask a small nation to deliver almost 30% of its GDP upfront in cash in the space of three days. Such an outrageous request had not previously been made to any bailed-out country – it made a laughing stock of the island's pro-European government. Second, it was not Cypriot national debt that was unsustainable, but that of the country's banks. And there was a solution to that: after wiping out shareholders and junior bondholders, and imposing a haircut on senior bondholders, the European stability mechanism could have taken over the Cypriot banks. It could have then gradually shrunk them and put them on a resolution course, while giving Cyprus the time to recalibrate its finance-based economy. This option theoretically exists – it was decided by an EU summit last June – but the legal modalities are not there yet to implement it, because Germany has since changed its mind. Cyprus could, in exchange for this arrangement, securitise future revenues from its gas reserves and offer them as guarantees, together with a strict fiscal consolidation programme.

Two years ago, the European Central Bank could have decided to guarantee all sovereign bonds in the eurozone, like it did with its co-called "outright monetary transactions" programme last September, subject to the implementation of a stabilisation policy by the beneficiary countries. Instead, Greece's private debt was transferred to European taxpayers, causing animosity between the peoples of Europe. The country essentially defaulted, thus increasing uncertainty across the continent.

One thing is for certain: the eurozone, an aspiring global player, is offering up a Mediterranean outpost of strategic significance as a present to the Russians. It is just up to Moscow to decide whether it will accept it. And the Cypriot no will ridicule pro-European elites in Greece and elsewhere, as it will make it look as if there was an ideal solution that was simply ignored by "Merkel's puppets". By the time that people realise that this alternative is far from ideal, it may already be too late.

The question remains as to why all this is happening. Why are northern European countries acting as if they are set on destroying the eurozone, instead of fixing it? I don't believe in a sinister conspiracy at the heart of all this, but there does seem to be an unthinking, subconscious racism at play – which is just as destructive. The current political discourse implies that all wealth accumulated in northern Europe is the fair reward of a protestant work ethic, while wealth accumulated in the south is a product of corruption (Greece, Italy), tax evasion (Cyprus), or unsustainable business models (Spain). That is why southern European countries are being asked to change their economic models not through a gradual convergence process, but by violent shock.

The inconvenient truth, of course, is that it was not too long ago that Finland was almost bankrupt, and there are still people old enough to remember Germany's own debt restructuring. "Our finest and blondest friends" (as Blackadder put it) in the north should realise that not all depositors in their own bailed-out banks had paid their taxes. Most importantly, there is not a single academic study that denies that northern Europe has gained at least as much from the euro as the south. If politicians don't start to communicate this soon, then the eurozone will not only collapse, but the ghosts of the past will come to life.

Why we should be cautious about cheering on Cyprus's no vote | Nikos Chrysoloras | Comment is free | The Guardian

In Cyprus a sense of anger and betrayal is everywhere

Charlie Charalambous guardian.co.uk, Wednesday 20 March 2013 17.40 GMT

Europe has stabbed Cyprus in the back. All us Cypriots can do is grit our teeth, and hope Russia offers a way out

Cypriot finance minister Michael Sarris is pictured in Moscow after talks with Russian officials. Photograph: Sharifulin Valery/ Sharifulin Valery/ITAR-TASS Photo/Corbis

Cyprus has blinked at passing an extraordinary tax on depositors, even if the consequences could mean it exiting the euro and financial chaos. At a vote on Tuesday, the Cypriot parliament threw out the controversial plan to skim €5.8bn (£5bn) from savers' bank accounts, leading to more euro instability.

Cypriots who have scrimped and saved for a rainy day faced the nightmare prospect of international bankers and European technocrats "stealing" their life's savings. Cyprus is a family-orientated country, and many parents have put money away for their children's education – the country has one of the highest proportion per capita of overseas university graduates. They now face an uncertain and turbulent future as banks have remained closed since Saturday, and any meaningful economic trade was placed on standby. The country is now running out of time to find a plan B to its crisis.

England was once described by Napoleon as a nation of shopkeepers; well, Cyprus is a country of small deposit holders. The local economy is built on family businesses and a large international financial sector – both have been crippled by the bailout scenario. There is no planning for the future, just gritting one's teeth for the financial firestorm that awaits. Following the Euro group's combined bail-in-bailout decision, the tax levy was already "locked" on accounts – at 6.75% on deposits up to €100,000 and at 9.9% for amounts above €100,000. People couldn't access their accounts as banks had discounted deposits before customers could withdraw their money, but as of today this is no longer the case after the tax was ditched. Over €30bn of the banking sector's €68bn in deposits are accounts of under €100,000.

Economists now argue that Cyprus is in a lose-lose situation: it is caught between a discredited bank system and foreign investors eager to get their cash out of Dodge. There were pictures in Tuesday's local papers of private jets parked at Larnaca airport after Russian millionaires flew into the island to take their money somewhere else. The feeling among the government and the political parties is that Cyprus has been "stabbed in the back" by Europe while being treated as the euro zone's guinea pig by Germany because it is small and defenceless. The president, Nicos Anastasiades, has made it abundantly clear that Cyprus was backed into a corner and had a gun pointed to its head – it was either the tax or your economy, take it or leave it.

The sense of anger and betrayal is everywhere, permeating every conversation from coffee shops to office buildings. Cypriots believe they are being picked on because of a perception that the island is awash with the ill-gotten gains of the Russian mafia – which is why international creditors were quite happy to tax deposits above €100,000. But Cyprus argued that if it focused solely on wealthy foreign investors, mostly Russians, its reputation as a financial hub was doomed. There is unease that close ally and friend Russia is also made a scapegoat in the island's bailout debacle; Russian deposits in Cyprus are estimated at up to €20bn – larger than the island's economy. "Burdening large deposits with a higher tax would have destroyed our ability to attract foreign investment," finance ministry official Andreas Charalambous told reporters on Tuesday. "Sizeable Russian deposits should not be seen as a problem – there are Russian entrepreneurs everywhere, not only Cyprus."

President Anastasiades was elected last month as the man who could do business with Europe and negotiate a better bailout than his communist predecessor. He also made an election pledge that he would accept a haircut on deposits. His friends in Europe gave him short shrift when he baulked at their bank tax demand, which he said was tantamount to "blackmail". Anastasiades should have walked from the Euro group when given the "suicidal" ultimatum on the bank tax – he did not have a mandate to agree such a move. As a result, his reputation as someone who can influence the Europeans in Cyprus's favour has been badly damaged, but he has accepted the people's voice and is looking for a third way out of the crisis.

At the 11th hour finance minister Michael Sarris is now in Moscow. Cyprus is once again looking to the east for much-needed financial help after its friends in the west gave it an offer it had to refuse.

In Cyprus a sense of anger and betrayal is everywhere | Charlie Charalambous | Comment is free | guardian.co.uk

Cyprus banks shut until Tuesday amid scramble for Plan B

 

Robert Peston Business editor 20 March 2013 Last updated at 18:33 GMT

Cash machines have been working, albeit with some limits

Eurozone crisis

• Q&A: Cyprus bailout
• Cyprus crisis: What happens next?
• How damaging is it?
• Why Cyprus rescue breaks all the rules

Cypriot officials have said the country's banks, which were closed to prevent mass withdrawals, will remain shut until at least Tuesday.

On Wednesday afternoon the cabinet began an emergency meeting to discuss alternatives to an EU-IMF bailout deal rejected by parliament on Tuesday.

Reports say the government is considering imposing capital controls when banks are reopened.

Meanwhile, Cyprus' finance minister is in Moscow to seek help from Russia.

Russia holds multi-billion dollar investments in Cyprus.

Finance Minister Michalis Sarris said after talks with Russian Finance Minister Anton Siluanov: "There were no offers, nothing concrete," but he added, "we're happy with a good beginning."

“What the mess in Cyprus shows is that eurozone governments are a million miles from feeling comfortable about using their taxpayers' money to sort out the problems of banks outside their home countries”

Talks are expected to continue in Moscow on Thursday.

The banks will remain shut on Thursday and Friday this week and Monday 25 March is a scheduled bank holiday. The stock exchange also remains closed.

Germany has said banks in Cyprus may never reopen if a bailout is not agreed.

 

'Not sustainable'

Earlier, Cypriot President Nicos Anastasiades met party leaders and the central bank governor in Nicosia to hammer out a Plan B, after a one-off tax on savings failed to get the support of any MPs.

Mr Anastasiades has also been talking to the European Union, European Central Bank and International Monetary Fund (IMF).

Bank mergers, a bond issue and more Russian funding have all been mentioned as ways to help the country out of the crisis.

The establishment of a "bad bank" which would take on risky assets held by Cypriot banks has also been mentioned by officials.

The BBC's Mark Lowen, in Nicosia, says Cyprus' banks are still giving out cash through machines - although with limits, and some are running low.

Some businesses are now refusing credit card payments, our correspondent reports.

On Wednesday, German Chancellor Angela Merkel said she regretted but respected the Cypriot vote.

She said the eurozone had a duty to find a solution for Cyprus, but added that the country's current banking system was "not sustainable".

Cyprus' banks were left exposed following the debt crisis in Greece and there are fears Cyprus could go bankrupt if they fail.

German Finance Minister Wolfgang Schaeuble warned Cyprus that its banks might never be able to reopen if it rejected the bailout.

 

Options for Cyprus

• Declaration of insolvency
• Revised bailout but still with bank levy
• Bigger EU bailout
• Increased Russian funding

• Cyprus crisis: What happens next?
• Anxious Cypriots fear for future

 

'Honest discussion'

The controversial levy had been proposed as the condition for the 10bn-euro (£8.7bn; $13bn) EU and IMF bailout. Cyprus was expected to raise 5.8bn euros through the one-off tax on bank savings.

The plan was altered on Tuesday to exempt savers with less than 20,000 euros (£17,000), but a 6.75% charge on deposits of 20,000-100,000 euros and a 9.9% charge for those above 100,000 euros remained.

However, parliament rejected the deal, with 36 MPs voting against it, 19 abstaining and none in favour.

 

“This is an undisguised act of expropriation, in other words something from the arsenal of the Bolshevik class struggle, but not civilised economic policy”

 

Editorial in Russian Moskovskiy Komsomolets newspaper

• Russian press fume at Cyprus rescue plan

Protesters outside parliament reacted with joy at the decision.

In Moscow, Mr Sarris met Mr Siluanov to discuss the easing of the terms on a 2.5bn euro loan Moscow gave Cyprus in 2011 - and the possibility of further funding - but no deal was reached on Wednesday.

"We had a very honest discussion, we've underscored how difficult the situation is," Mr Sarris said.

Cyprus has attracted money through its lower taxes, with Russians holding between a third and half of all Cypriot deposits.

Russian private and corporate deposits are believed to total about $30bn.

Russian President Vladimir Putin had called the bailout deal "unfair, unprofessional and dangerous".

 

Cyprus' offshore energy fields

• The 13 exploratory energy blocks south of Cyprus could hold gas reserves of as much as 60 trillion cubic feet, the head of Kretyk, the country's state hydrocarbons company said.
• That would be worth about 475bn euros at today's prices according to Bloomberg.
• Noble Energy granted first contract to explore Block 12 in October 2008.
• Unresolved conflict with Turkey over issue of national sovereignty surrounds the field, dubbed Aphrodite, with Ankara objecting to tenders issued by Cyprus.

Sources: Cypriot government, Kretyk, Oxford Institute for Energy Studies

Analysts say Russia may provide more funding in return for interests in Cyprus' offshore energy fields.

One offer of help has come from Cyprus' Orthodox Church, which is a major shareholder in the third-largest domestic lender, the Hellenic Bank.

Archbishop Chrysostomos I said on Wednesday the Church was willing to mortgage its assets to invest in government bonds.

Cyprus resident Gary Winwood told the BBC the situation was "dire" and there was great anxiety about the possibility of a collapse of the banks.

"Most of our money is kept in deposits in a savings account so I cannot make withdrawals. The cash machines are supposed to be restocked but are often found empty. We've got enough money to last us until the end of the week," he said.

Russian expat Natalia Kuleshina, who withdrew all her cash before the banks closed, said people were now afraid about whether salaries would be paid.

BBC News - Cyprus banks shut until Tuesday amid scramble for Plan B

Cyprus: panic as savings levy is imposed

Paul Gallagher and Helena Smith guardian.co.uk, Saturday 16 March 2013 19.14 GMT

Cypriots rush to ATMs before savings are docked as part of a bailout deal agreed in Brussels

Cyprus's rightwing leader Nicos Anastasiades believes his country will default following the move, and threaten to unravel investor confidence in the eurozone. Photograph: Jamal Saidi/REUTERS

Cypriots reacted with shock that turned to panic on Saturday after a 10% one-off levy on savings was forced on them as part of an extraordinary 10bn euro (£8.7bn) bailout agreed in Brussels.

People rushed to banks and queued at cash machines that refused to release cash as resentment quickly set in. The savers, half of whom are thought to be non-resident Russians, will raise almost €6bn thanks to a deal reached by European partners and the International Monetary Fund (IMF). It is the first time a bailout has included such a measure and Cyprus is the fifth country after Greece, the Republic of Ireland, Portugal and Spain to turn to the eurozone for financial help during the region's debt crisis. The move in the eurozone's third smallest economy could have repercussions for financially overstretched bigger economies such as Spain and Italy.

People with less than 100,000 euros in their accounts will have to pay a one-time tax of 6.75%, Eurozone officials said, while those with greater sums will lose 9.9%. Without a rescue, president Nicos Anastasiades said Cyprus would default and threaten to unravel investor confidence in the eurozone. The Cypriot leader, who was elected last month on a promise to tackle the country's debt crisis, will make a statement to the nation on Sunday.

The prospect of savings being so savagely docked sparked terror among the island's resident British community. At the Anglican Church's weekly Saturday thrift shop gathering in Nicosia, Cyprus's war-divided capital, ex-pats expressed alarm with many saying that they had also rushed to ATMs to withdraw money from their accounts. "There's a run on banks. A lot of us are really panicking. The big fear is that there soon won't be cash in ATMs," said Arlene Skillett, a resident in Nicosia. "People are worried that they're automatically going to lose ten present [of their savings] in deposit accounts. Anastasiades won elections saying he wouldn't allow this to happen."

She said a lot of elderly Britons had transferred savings to the island when they had decided to retire there. "Nobody can understand how they can do this – isn't it illegal? How can they just dock money from your account?" she asked.

In the coastal town of Larnaca, Cypriots described how they had queued from the early hours in the hope of withdrawing deposits from banks. "A lot of us just can't believe it," said Alexandra Christofi, a divorcee in her 40s who said she had rushed to her bank before doors even opened at 6am. "I had put my money there for a rainy day. It's absolutely all I have and I cannot understand how Cyprus is being singled out. Other EU countries got bailouts and we're only in this position because we supported Greece," she said, referring to the massive losses the Cypriot banking system suffered as a result of Greece's restructuring its debt last year. "Where is the fairness in that? Where is the solidarity and support that is meant to be the reason why we are all unified in this common currency in the first place?"

Maria Zembyla, from Nicosia, said the levy would make a "big dent" in her family's savings and "erode the investor confidence". "It is robbery. People like us have been working for years, saving to pay for our children's studies and pensions and suddenly they steal a big share of this money. Russians that currently keep the economy afloat will leave the country along with their money," she added.

Howard Skelton, in Limassol, said: "The only people who will benefit in the long term are the banks. It will be many years before the man in the street begins to feel any benefit from this bailout. The sooner I can return to the UK the better."

The levy does not take effect until Tuesday, following a public holiday, but action is being taken to control electronic money transfers over the weekend. Co-operative banks, the only ones open in Cyprus on a Saturday, closed following a run on the credit societies while ATMs cancelled transactions due to "technical issues".

"I wish I was not the minister to do this," Cypriot finance minister Michael Sarris said after Friday's late-night talks in Brussels. "Much more money could have been lost in a bankruptcy of the banking system or indeed of the country."

Depositors started queuing early to withdraw their cash, and protestors gathered outside the presidential palace. "I'm extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans," said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.

"They call Sicily the island of the mafia. It's not Sicily, it's Cyprus. This is theft, pure and simple," said a pensioner.

IMF managing director Christine Lagarde, who attended the meeting, said she backed the deal and would ask her board in Washington to contribute to the bailout. "We believe the proposal is sustainable for the Cyprus economy," she said, "The IMF is considering proposing a contribution to the financing of the package. The exact amount is not yet specified."

Cyprus: panic as savings levy is imposed | World news | guardian.co.uk

Greece is no Ireland, says banking group as bailout stalls

 

By Denise Roland 3:51PM GMT 14 Mar 2013

Debt-laden Greece was set unachievable fiscal targets, unlike Ireland, said a leading global banking group, as the island's troika of international lenders delayed its next tranche of bailout cash.

Some analysts argue that a new write-down of Greek debt will be necessary to make Athens' burden sustainable, this time targeting bonds held by the ECB. Photo: EPA

The Institute of International Finance (IIF) has called for more money to be poured into Greece for it to emulate Ireland's success, warning that a failure to do so would end up costing more.

Its caution came as talks between Greece and its troika of international creditors - the EU, European Central Bank and International Monetary Fund - were put on hold due to "outstanding issues", largely around clashes over civil service job cuts.

Approval from the troika, who will resume talks with Athens in early April, will be needed to release a further €2.8bn to the troubled economy, originally scheduled for the end of March. Despite the delay, Yannis Stournaras, Greek Finance Minister, said he considered the loan tranche as "secure".

While in Ireland "consolidation measures have been painful but more manageable politically and socially", the targets set for Greece "were not achievable", said Jeffrey Anderson, senior European director for the IIF in a research note.

"Applying the Irish example in Greece to help restart growth would require some additional funding," he said, adding that the final cost "would be much less than might eventually be needed if [Greek] output continues to fall and doubts about debt sustainability remain entrenched."

Ireland, which received an €85bn bailout in 2010, is hailed as a European success story, triumphantly storming back to the long-term bond markets on Wednesday having endured a fiscal squeeze of 16pc and stabilising its debts. It hopes to be the first euro zone nation to exit a bailout by the end of this year.

Meanwhile the Greek economy, while comparable in size to Ireland's, got a bailout nearly three times the size at €240bn, as well as €100bn in cancelled debt from private creditors.

There are still concerns about the sustainability of Greece's debt, however.

While the public deficit is forecast to fall to 4.3pc of GDP this year, the Greek economy contracted last year by 6.4pc.

Some analysts argue that a new write-down of Greek debt will be necessary to make Athens' burden sustainable, this time targeting bonds held by the ECB.

The IMF has voiced support for such a move, while the ECB has repeatedly ruled it out.

Greece is no Ireland, says banking group as bailout stalls - Telegraph