Cyprus in crisis: banks on the brink
As queues form at ATMs, businesses seize up and Europe blows a chill wind, Cypriots are feeling powerless, vulnerable and bitter
Just over a week ago, finance ministers from the 17 countries in the euro zone and officials from the EU and IMF filed into a drab room at the Eu ropean Council’s Brussels headquarters.
The deal that emerged in the early hours of Saturday morning stunned Cypriot residents and citizens across Europe. The unprecedented proposal to tax deposits in Cypriot banks, through a levy of 9.9 per cent on deposits over €100,000 and a tax of 6.75 per cent on deposits of less than that, marked a departure in the euro zone’s response to the economic crisis.
On Thursday, five days after the announcement, the head of the group of 17, Jeroen Dijesselbloem, tried to explain the reasoning behind the decision to MEPs.
“Tax measures would have primarily touched the local people, whereas the banking sector has a large share of nonresident large deposit holders,” he said, adding that European authorities had been loath to tax deposits less than €100,000.
The insinuation, which gained credence as the week went on, was that the Cypriot authorities had been reluctant to protect smaller depositors. Cypriot authorities were concerned about the impact on their country’s financial industry, shifting more of the burden to larger, often nonresident depositors.
But by the time Dijesselbloem spoke, it was too late. Having left Brussels on Saturday morning with the deal done, euro-zone leaders found themselves on the back foot all week, mired in recriminations about who was to blame for the bailout fiasco.
The decision to hold the meeting on Friday evening was not unusual. It meant a deal could be struck after the markets closed, with the bonus of a Cypriot bank holiday on Monday. But the timing had the opposite effect, and allowed a media storm to brew last weekend.
Finance ministers might argue that they are not public-relations experts, but communication is part of their job and maintaining confidence is a central plank of economics. The challenge for euro-zone authorities throughout the crisis has been to display a cohesive and consistent policy. The Cypriot deal is typical of the disconnect between European policymakers and the people they are meant to represent.
Now, Cypriots are in war mode. Enemy bombs and paratroopers are not coming out of the sky as they did when Turkey invaded in 1974, but a siege mentality has taken hold. Most shops are empty, business has ground to a halt, queues have formed at cashpoints and people have been filling their cars in case petrol runs out.
People are also spending tactically. One man says he has asked his daughter, who is at university in Britain, to come home because he cannot pay the fees. In a Debenhams in Nicosia, the manager tells of a woman who bought €300 euro worth of clothing three weeks ago returning her purchases and asking for her money back. “People are keeping cash for food and other essential expenses,” she says.
Thirty-nine years ago, older Cypriots endured expulsion from their homes in the north by Turkish troops armed by Nato, as well as living in tents or with relatives in the south, and the privations imposed by austerity. Younger residents, for whom the events of 1974 are history, are shocked that they and their families now face hard times and ruin. If they have not already lost their jobs because of the three-year slump, they fear unemployment and emigration. Cypriots feel powerless, vulnerable and bitter.
Queueing at a Bank of Cyprus cashpoint this week, Michael Michaelides, a former hotelier, says, “1974 was different. After the invasion Europe came to help us. Now they are squeezing us like a lemon, and once they have squeezed out all the juice they will throw away the rind.”
Cypriots and foreign residents, some of them retirees living off savings, are outraged by the terms of the troika that were to be imposed on all banks and residents of the republic, including 170,000 foreigners, of whom 106,000 are EU citizens.
Modest savers say they cannot afford a tax. Bankers, accountants and lawyers representing foreign clients insist the levy would prompt them to take their money elsewhere and destroy the financial sector, the most lucrative in the Cypriot economy.
Plans for a rescue have been in train for some time. Cyprus requested a bailout last June, becoming the fourth country after Greece, Ireland and Portugal to request an international rescue package. Spain has sought a €40 billion bank bailout.
Cyprus’s problem relates to its banking system. Worth four times its GDP, it has been badly hit by the write-down of sovereign debt that was part of the Greek bailout. But concern about Russian money-laundering activity, and frustration with the previous government’s commitment to reform , delayed agreement on the bailout. In January, euro-zone officials confirmed that the bailout would be agreed after the Cypriot general elections this month.
As that bailout unravelled this week, questions have been raised about Cyprus’s inclusion in the euro zone in the first place. Its accession to the EU, in 2004 ,was controversial, but Greece effectively threatened to veto the admission of other states if Cyprus was not admitted.
Now, despite public sympathy for Cypriots, many in the EU have expressed distrust of the island’s political and tax credentials. While Germany has been criticised for its hardline stance against Cyprus, even countries such as France, usually sympathetic to the plight of smaller depositors, are reluctant to support a country that is a haven for offshore funds.
Cyprus’s role in the euro zone is a crucial question over the next few days. With a population of fewer than a million, and just 0.2 per cent of overall European GDP, the threat that it may be sacrificed to save the euro zone will hang over discussions.
All eyes are now on Tuesday, when banks are scheduled to reopen, though the introduction of a capital-control bill, designed to prevent an outflow of deposits from Cyprus, will give the finance minister and central-bank governor powers to limit withdrawals and transfers of money.
Caught between Russia and Europe, and facing an unstable future, Cyprus could be forgiven for feeling unloved. Since the fall of the Soviet Union, in 1989, Russian businessmen, banks and individuals have become big depositors at Cypriot banks. While Cyprus has been accused of laundering the ill-gotten funds of Russian oligarchs, many legitimate Russian firms have also set up here. There is a community of 10,000 Russian people, some of them naturalised Cypriots.
When Cyprus celebrated its entry to the EU in 2004, its citizens believed their country could be a hub linking these regions to Europe. Now, disappointed, they believe the EU they joined, at considerable cost to their industries, sees them as a small people who can be bullied.
The man in the ATM queue saves his harshest words for the bankers and politicians. His words have a familiar ring for Irish people. “How many thousands of euro did they disappear? Nobody has gone to jail. Every one protects everyone else.”