Cyprus' banks to remain closed until Thursday
By ELENA BECATOROS
Associated Press
Cyprus ordered banks to remain closed for two more days over fears of
a run by customers trying to get their money out, after striking a
pre-dawn bailout deal Monday that averted the country's imminent
bankruptcy.
The sudden midnight postponement of the much anticipated Tuesday bank
opening by all but the country's two largest lenders was sure to hammer
businesses already reeling from more than a week of no access to their
deposits.
ATMs have been dispensing cash but often run out, and an increasing
number of stores and other businesses have stopped accepting credit or
debit cards. The two largest lenders, the struggling Laiki and Bank of
Cyprus, have imposed a daily withdrawal limit of 100 euros ($130).
Cyprus clinched an eleventh-hour deal with the 17-nation eurozone and
the International Monetary Fund early Monday for a 10 billion euro ($13
billion) bailout. Without it, the country's banks would have collapsed,
dragging down the economy and potentially pushing it out of the euro.
Under the deal, the country agreed to slash its oversized banking sector
and inflict hefty losses on large depositors in troubled banks.
The country's banks have been closed since March 16 to avert a run on
deposits as the country's politicians struggled to come up with a way to
raise enough money to qualify for the bailout. An initial plan that
would have raised 5.8 billion euros by seizing up to 10 percent of
people's bank accounts enraged depositors and was soundly rejected by
lawmakers early last week.
But with the immediate crisis averted, worry spread across Europe that
the deal could boomerang, spooking investors and hurting the eurozone's
efforts to keep its debt crisis from spreading.
"The Cypriot bailout has a powerful legacy which may alter the security
with which depositors elsewhere in the eurozone view the safety of
banks," said Jane Foley, an analyst at Rabobank International.
The initial plan to seize a percentage of all deposits sent jitters
across the eurozone. European officials, anxious to prevent any further
spread of the financial crisis that has already left Greece, Ireland and
Portugal dependent on bailout funds, had been at pains to point out that
Cyprus was a unique case.
The country of about 800,000 people has a banking sector eight times
larger than its gross domestic product, with nearly a third of the
roughly 68 billion euros in the country's banks believed to be held by
Russians. Germany in particular long insisted that Cypriot banks, which
attracted foreign investors with high interest rates, needed to
contribute to the bailout.
Jeroen Dijsselbloem, the Dutch finance minister who chairs the Eurogroup
gathering of the eurozone's finance ministers, said Monday that
inflicting losses on the banks' shareholders, bondholders and large
depositors should become the eurozone's default approach for dealing
with ailing lenders.
"If I finance a bank and I know if the bank will get in trouble I will
be hit and I will lose money, I will put a price on that," Dijsselbloem
said in a joint interview with the Financial Times and Reuters. "I think
it is a sound economic principle. And having cheap money because the
risk will be covered by the government, and I will always get my money
back, is not leading to the right decisions in the financial sector."
However, forcing losses on large deposits could encourage investors to
pull money out of weaker southern European economies to more stable
nations in the north, like Germany.
That concern was evident in markets. The euro currency, used by more
than 330 million Europeans, initially rose against the dollar to about
$1.30 on news of the bailout agreement, but tanked below $1.29 - its
lowest level since November - following Dijsselbloem's remarks. European
stock market indexes also lost their earlier gains, with bank shares
hardest-hit, particularly in financially weak countries like Italy and
Spain.
On Wall Street, stocks reversed an early rise as traders returned to
worrying about the eurozone, and the Dow Jones industrial average closed
down 0.4 percent.
After a whirlwind of nervous market reactions, Dijsselbloem issued a
terse clarifying statement, saying Cyprus was "a specific case with
exceptional challenges which required the bail-in measures."
"Macro-economic adjustment programs are tailor-made to the situation of
the country concerned and no models or templates are used," he added.
Under the new Cyprus bailout plan, 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, and its top lender, Bank of
Cyprus, with the remainder coming from tax increases and privatizations.
People and businesses with more than 100,000 euros in their accounts at
Laiki face significant losses. The bank 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 Bank of
Cyprus.
Deposits at Bank of Cyprus above 100,000 euros will be frozen until it
becomes clear whether or to what extent they will also be forced to take
losses. Those funds will eventually be converted into bank shares.
It's not yet clear how severe the losses will be to Laiki's large bank
deposit holders, but the euro finance ministers noted that the
restructuring is expected to yield 4.2 billion euros ($5.4 billion)
overall. Analysts have estimated investors might lose up to 40 percent
of their money.
Speaking about the marathon 10-hour negotiations in Brussels that
resulted in the deal, Cyprus President Nicos Anastasiades said "the
hours were difficult, at some moments dramatic. Cyprus found itself a
breath away from economic collapse."
The agreement, he said, "is painful, but under the circumstances the
best we could have ensured. The danger of Cyprus' bankruptcy is
definitively overcome and the tragic consequences for the economy and
society are averted."
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Juergen Baetz in Brussels contributed to this story.
Copyright
2013 Associated Press. All rights
reserved.
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