Banks in Cyprus are scheduled to reopen after staying closed for more than a week in Europe’s latest financial crisis. Some restrictions will remain in place, the Associated Press reports:
Cash withdrawals will be limited to 300 euros ($383) per person each day. . .
Other capital controls include a cap of 5,000 euros on transactions with other countries, provided the customer presents supporting documents. Payments above that amount will need special approval.
Travelers leaving the country won’t be able to take with them anything over 1,000 euros in cash — as well as the equivalent sum in foreign currency.
As part of a deal reached over the weekend, Cyprus will receive $13 billion in loans from international lenders, but one of the country’s largest banks will close, and there will be other costs, too:
The deal. . . will force large losses on those holding deposits of more than $130,000 in Cypriot banks, and it will split the country’s second-largest bank, Cyprus Popular, also known as Laiki, into two. Deposits of less than $130,000 will go into a “good” bank. Deposits above that level will go into a “bad” one, and depositors and bondholders may recover little or none of their money.
The country’s banks were using Russian deposits to buy Greek bonds. The Greek bonds went bad, and the Cypriot banks lost a bundle. They now need a bailout from their euro zone partners, but it’s tough to convince German taxpayers to pony up if they think the money is really going to Russian oligarchs.
Last week, the International Monetary Fund, the European Union and Cyprus’s own government concocted a scheme that would have propped up two of the island’s largest insolvent banks, partly by confiscating the supposedly insured deposits of small savers. The Cypriot parliament rejected it in the face of amply justified public protests. Plan B winds up the two banks, puts a de facto end to Cyprus’s days as an unsustainable offshore bank center and imposes the costs on big depositors — who include a disproportionate number of Russian tax avoiders and similar folk.
Neil Irwin criticized Eurogroup president Jeroen Dijsselbloem, who suggested Monday that the Cypriot plan could be a model for resolving troubled banks elsewhere:
If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders. . . It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realize that it may also hurt them.
Irwin writes that forcing depositors to pay and restricting the flow of funds in banks sets a dangerous precedent:
If you are a depositor in a European bank, you now have every incentive in the world to move your money somewhere safer, or even to keep it in cash, the minute you detect any hint that your nation could end up in the same place Cyprus did. The next time there is a banking panic in Europe, it will move much faster, and be much harder to control, than those of the recent past, as depositors try to get ahead of future losses and capital controls.
The deal will have consequences outside Europe, too. Max Fisher writes that the agreement with European leaders is a diplomatic defeat for Russia:
Russia has a few interests at stake in the European Union bailout for Cyprus. The first and most obvious is that Russian citizens stand to lose billions of dollars worth of savings in Cyprus’s banking sector, which serves as a low-tax haven for Russian oligarchs. Those oligarchs, remember, wield outsize political power within Russia. The second is that Cyprus is a political client state of Moscow’s, a helpful little ally on such matters as sending arms to Syria. The third is symbolic, and doesn’t actually have that much to do with Cyprus itself, but with Russia’s standing in Europe.