Some people with large bank deposits in Cyprus are set to lose as much as 40 per cent of their money under a new bailout plan proposed for the ailing island state.
On Tuesday, the banks remained closed to stop mass withdrawals. Finance officials said accounts holding more than 100,000 euros will remain frozen until it becomes clear how much money they will lose in the bailout plan.
Those lost funds will eventually be converted into bank shares. It's not yet clear exactly how severe the losses will be, but financial analysts say investors may lose 40 per cent of their investment.
News of the bailout steadied European markets on Tuesday, though a controversial comment by a leading European finance official has left many wondering if what’s happening in Cyprus could happen again.
Jeroen Dijsselbloem, who chairs the meetings of the finance ministers of the 17 European Union countries that use the euro, said the Cyprus bailout was a template, leaving the impression that those with bank deposits above the uninsured level of 100,000 euros may be tapped in any future bailout.
Dijsselbloem later attempted to retract his comments and described Cyprus as a "specific case with exceptional challenges."
A top European Central Bank, meanwhile, rejects the idea that forcing losses on banks' shareholders, bondholders and even large depositors should become a new model for dealing with ailing lenders.
Benoit Coeure, who sits on the bank's six-member executive board, bluntly dismissed the idea, telling France's Europe 1 radio that Dijsselbloem was "wrong" to say that.
He said the solution agreed on for Cyprus cannot be a model for the eurozone because Cyprus's situation is unique. It has an outsized financial sector, including large deposits from foreigners.
Under the new Cyprus bailout plan clinched in Brussels early Monday, the bulk of the funds will be raised by forcing losses on accounts of more than 100,000 euros in the country's second- largest lender, Laiki, with the remainder coming from tax increases and privatizations.
Laiki will be dissolved immediately into a so-called bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation's biggest lender, Bank of Cyprus.
Also Tuesday, the chairman of the board of Bank of Cyprus, Andreas Artemis, tendered his resignation, a bank spokesperson said.
The board of directors was to decide on whether to accept the resignation later in the day, said the spokesperson, speaking on condition of anonymity because a decision had not yet been made.
All but two of the country's largest lenders had been due to reopen Tuesday, after being shut since March 16 while politicians figured out how to raise the funds necessary for Cyprus to qualify for an international bailout. But after initially saying most financial institutions would reopen Tuesday, the country's central bank made a surprise reversal just before midnight, announcing all banks would remain closed until Thursday.
The announcement followed a broadcast by the country's president, Nicos Anastasiades, who told Cypriots that the central bank would impose some limits on financial transactions, but assured the public that restrictions would not be permanent.
"It is a very temporary measure, which will gradually be relaxed," Anastasiades said.
Shipping business hampered
Businesses have already been feeling the brunt of the cash crunch, unable to pay salaries and suppliers as Cypriots have slashed spending to keep as much money on them in light of all the uncertainty surrounding the banks.
The banks' closure has been especially hard on the country's important shipping industry, which contributes about 5 per cent or 800 million euros to the economy.
Cyprus ranks 10th in the world in terms of the number if ocean-going vessels flying its flag, and it in the top five of countries with the largest number of ship management companies.
"This is destructive for us," said an official with Cyprus-based shipping company EDT Offshore, who spoke on condition of anonymity because his company did not authorize him to speak to the media.
"We have to pay our crews' salaries and that's $500,000, while we have to pay as much for our office staff by March 28 and we don't have access to our bank accounts," the official said. "These are people who need to pay their bills, have obligations to meet."
The official explained that authorities in the Greek port of Piraeus have prevented one of three EDT ships to leave until the company pays it port dues. That means the ship can't fulfill its contract with clients, meaning possible losses for the company which has a fleet of 18 vessels.
Other businesses have also been hammered by the bank closures as they find themselves unable to pay suppliers or fulfill orders.
"Cash is definitely a problem," said Nicosia pharmacist Lucy Santourian, counting out euro bills to a supplier who had just brought in new supplies of baby formula and other products.
"We normally pay 90 per cent of our suppliers on credit, once a month at the end of the month. Now most are asking for cash only."
The retail market is sharply down too, shop owners say, with customers unwilling to spend on anything but the basics while they have limited access to cash.
"The continuation of this uncertainty is pushing the economy deeper into recession, some businesses could possibly lose their clients, but we're hopeful once this situation is sorted out, the market can rebound quickly," said Michalis Pilikos, head of the Cyprus Employers and Industrialists Federation.