The rescue of Cyprus won't feel like one to its people

 
Demonstrators in Nicosia There have been demonstrations in Nicosia against the planned bailout

Although eurozone governments and the International Monetary Fund have rescued Cyprus, it probably won't feel like much of a rescue.

The second largest bank, Laiki, is being closed. Losses from its closure, which will be substantial - billions of euros - will be absorbed by holders of its bonds and those with deposits over 100,000 euros ($130,000; £85,000).

So at a stroke, one important source of credit to the economy will be eliminated.

There is some relief for those with savings of 100,000 euros or less, because their cash will be transferred to the Bank of Cyprus, the country's biggest bank, and kept intact.

But Bank of Cyprus too is being reconstructed. And the costs of making sure it has enough capital to operate safely in the future will also fall on its deposits greater than 100,000 euros. So these depositors too will incur losses running to billions of euros.

In the many months it will take to rehabilitate Bank of Cyprus, the prospects of it providing adequate credit to households and businesses are slim indeed.

Meanwhile, foreign banks operating in Cyprus will probably head for the hills, knowing that an economy already in recession will probably now contract at a rate of knots - causing penury to many.

So, in summary, getting any kind of conventional loan in Cyprus over the next year may be almost impossible.

In the long term as well, prospects for this economy will be extremely challenging: the country's important offshore banking industry, the business of looking after the tax-escaping cash of Russian businesses and individuals, is in effect being closed down forever. All those losses being heaped on large depositors are reason enough for anyone with a choice about where to place their cash to stay away from Cyprus forever.

So here is the Cyprus "rescue" in a nutshell:

  1. An economy that will be starved of credit, and will therefore shrink rapidly and very painfully for citizens
  2. An economy whose main industry, offshore banking, is being shut.

Although there may be some relief that smaller savings no longer face a 6.7% levy, Cypriot citizens may over time end up feeling more than 6.7% poorer as a result of this so-called bailout.

The price for Cyprus of staying in the eurozone will be as great as for the people of any of the currency union's over-indebted nations.

What should give the eurozone's leaders some pause for thought is that at some point the people of countries in financial difficulty may begin to wonder whether they are right to be paying this steep bill to preserve the euro.

UPDATE 15:55 GMT

Although the European Commission says such restrictions must be temporary, such a staunching of capital flows would breach the fundamental rules of the EU, and is anathema to investors.

Being told that you can't have your money as and when you want it represents an appalling nightmare for the institutions and individuals who control the world's biggest pools of wealth.

The risk for the eurozone is that this cessation of the free movement of money across borders is seen as a precedent - and therefore nervous investors and lenders would pull their money out of other economies and banking systems perceived to be weak, such as those of Italy and Spain.

That would exacerbate the recessions in those economies, weaken their banks and further undermine the cohesion and integrity of the Eurozone. Talking to central bankers and regulators, what they're all most worried about is the imposition by Cyprus of capital controls, or restrictions on money leaving the country.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 942.

    A robbery is always a robbery - no matter what it is dressed up like.

    If Russian deposits are as "dirty" as Western media claim, then we would see EU-Cyprus deal makers exterminated - 110 000 Russians were murdered annually between 1991 and 2001 for less than 5.8 bln.
    More likely, what happened in Cyprus, is to EU financial system what the Sarajevo, June 28, 1914 shot did to peace in Europe.

  • rate this
    0

    Comment number 941.

    All the uproar and sympathy is on the people who stood to lose a few hundred pounds, 6.75% of their savings or who face uncertainty. Not everyone who had more than €100k in the Bank of Cyprus was a Russian tycoon as people say. It is also the life savings of pensioners and as in the case of my grandparents who had emigrated there, the sale of their house before another was bought.

  • rate this
    0

    Comment number 940.

    A lot of people with only just over the €100k mark are definitely not "rich". An ordinary working person could, through hard work, scrimping and saving and going without luxuries all their lives save €200k. That is probably a mystery to a spoiled generation who spend, spend on credit. Now €400k, €500k seems more suspect and certainly €1m....this is the level EU need to be looking at.

  • rate this
    0

    Comment number 939.

    Cyprus Was Handled Correctly

    Theft I hear as bank depositors with over 100,000 euros take a hair cut.

    Nonsense ! If Bank(s) goes bankrupt - depositors lose most or all their money. If taking a haircut saves the majority of their money they are winners! Why should tax payers bail them out and then suffer?

    If the UK and USA had adopted this approach - We would have recovered already.

  • rate this
    0

    Comment number 938.

    928. Pabsontour
    7 HOURS AGO
    If Cyprus was a tax haven - which we all seem to agree it was; And the people in a tax haven with deposits over €100k will be (in general) ....

    ++++
    While a part of me agrees with you it is the (in General) bit is the biggest problem here I think.

  • rate this
    0

    Comment number 937.

    We do seem to lurching from one EU economic disaster to another and as bad as that is it does seem to be democracy that keep getting the sharp end on the stick.
    I know some investors got it this time too, but it seems to constantly be without the will of the people.
    They should have had another vote not just had the Eurocrats impose there will on this

  • rate this
    +1

    Comment number 936.

    Ah hell, a couple of the cars on our street were bought with dodgy money. The police have just informed the residents that anyone with 2 or more cars will have the 2nd once confiscated as they're short of money.

  • rate this
    +1

    Comment number 935.

    There will be widespread tax evasion by the Cypriot populace, and since, as in PIIGS, their govt. has abandoned it in favour of international capital, who can blame it?

    Not I.

  • rate this
    +1

    Comment number 934.

    the more folk are treated like this, so the more likely bank runs will break out, the whole cycle is a domino effect...

  • rate this
    0

    Comment number 933.

    Social irony. You purchase from a respectable outlet, counterfeit cigarettes which are then reported to authority as a health and safety issue. Nuts for the squirrels.

    The Chancellor has in myopinion kept his temper rather well in voicing concern regarding handling (not) of the Cypriotic bank hic cups. You tell 'em George.

  • rate this
    0

    Comment number 932.

    @928
    "If Cyprus was a tax haven - which we all seem to agree it was; "

    Ah, no. In fact, why don't you offer a definition.

    Be careful. It might be harder than you think, once you realize that it is an inherently relative term.

  • rate this
    0

    Comment number 931.

    What I want to know is, are the geographic co-operative banks in Cyprus (which run more like credit unions) be sucked into this broken banking system with reforms?

    I ask because, while the main banks lost all their money in Greece, these small co-operatives, normally functioned within the geographial locale and not much further out and remain largely unaffected by the curret EU banking crisis

  • Comment number 930.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +1

    Comment number 929.

    Robert - re your update - if I may say so (and as Basil Fawlty would say) its a statement of the bleedin' obvious that investors in the likes of Greece, Italy and Spain will be looking for safer places to park their money, now that the EU has made it plain that any future bailouts will follow the 'Cyprus model'..
    The EU really does make the rules up as it goes along - all to protect the euro..!

  • rate this
    +1

    Comment number 928.

    If Cyprus was a tax haven - which we all seem to agree it was; And the people in a tax haven with deposits over €100k will be (in general) the wealthy foreigners and companies who have the ability to switch funds to take advantage of tax havens and loopholes... then they have not been paying taxes to date. Fair enough I say

  • rate this
    +1

    Comment number 927.

    When will the politicians and the people in general finally get the message - you cannot make money from money. Borrowing large sums to build houses that can only be bought by others borrowing huge sums is little different from borrowing money from the bank to invest in bank bonds. It is a circular risk, only in the 2nd case without any useful economic activity inbetween.

  • rate this
    +1

    Comment number 926.

    I have not seen anything about the Employment in Cyprus. About 50% of the population work for the Goverment/Smigoverment orgianations. They recieve, on avarage, E40,000 a year, have 15+ bank Holidays, work about 6 hours a day. Get final salary pensions, which they don't contribute to, and recive 13 months salary, with a bounus for Christmas and Easter. No tears from me.

  • rate this
    +1

    Comment number 925.

    We can all bang on about the merits (or otherwise) off tax free banking. The wider issue here is the precedent of banks, effectively stealing depositors cash to ensure Euro funding. This should, and would if it were a 'banana republic', spell the end of the Franco German experiment. But, alas, it won't be. The Euro is more than a currency. It is clearly a more sinister weapon..but to what aim?

  • rate this
    0

    Comment number 924.

    Robert - thanks for helping us all make sense of the non-sense of it all. As Mark Twain apparently recounted...'sooner or later we all sit down to a banquet of consequences'... Sadly, as with so much of recent economic woe it is not the perpetrators who lose out, it seems to be almost everyone bar them! Practical application of principals are where reality bites and so it seems with the euro...

  • rate this
    +2

    Comment number 923.

    Again and again it's the customers and creditors lower down the food chain than the banks who ensure that the banks get their money back when a business fails. Nobody really questions this arrangement, but now it's the customers of failed banks who are being asked to pay perhaps it's time to review the limited liability laws and ask the owners to cough up more.

 

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