Cypriot banks prepare to open tomorrow for the first time in 13 days, even as the process of refinancing them is still underway. Authorities are trying to avoid a massive capital flight from depositors.
The finance minister has decreed a severe set of capital controls which are to remain in force for four days. Cyprus will forbid money transfers abroad except to pay for imports or student tuition. Cypriot credit cards will have a limit of just under 5000 euros abroad, and outbound travellers will only be able to carry 3000 euros or other currency equivalent. Individuals and companies based in Cyprus will be obliged to repatriate their earnings from overseas activities within two weeks of transactions.
The tough decree, if confirmed as the final one, aims to keep as well as replenish deposits in Cyprus, amid fears of an impending capital flight.
Banking and corporate legal services are the island’s major industries. But a deep recession is still feared likely. The Institute of International Finance which represents banks worldwide believes the island could lose a fifth of its economy by over the next two years.
The full draft decree stipulations are as follows:
- No cheques may be cashed, only deposited
- No money transfers abroad except to pay for imports or tuition and student expenses (5,000 euro per student per quarter)
- Credit card transactions abroad are limited to 5,000 euros per card
- No escrow accounts may be terminated prematurely
- Outbound travellers may only carry 3,000 euros in cash - or other currency equivalent
- Controls apply to all accounts of all financial institutions in all currencies held in Cyprus
- The only exceptions are for the state of Cyprus and the central bank
- Any individuals living in Cyprus or institutions headquartered there must repatriate to Cyprus any monies resulting from transactions abroad within two weeks of the transaction
These proposals may have been influenced by the Institute of International Finance, which represents banks and financial institutions, and which today released a report expecting capital flight to be high. Cypriot central banker Panikos Dimitriades last week said he estimated it at seven billion euros.
Whatever the flight, though, Cyprus is expected to lose much of its services economy. The IIF says that "while it is hard at the current time to be confident about the degree of likely declines in GDP, it seems plausible that the cumulative decline could amount to as much as 20% of GDP in 2013-15."
The two biggest Cypriot banks, the Bank of Cyprus and Laiki Bank, have been in crisis since Eurozone finance ministers on March 16 refused to refinance them with a loan. The Eurozone only agreed to lend ten billion euros to the sovereign, which may be used to balance the budget and shore up pension funds, but not to refinance banks.
The banks’ only choice now is to take a chunk of depositors’ money and turn it into shares. The two banks are insolvent because they invested heavily in Greek bonds, whose value collapsed. The IIF had choice words for Cypriot negotiators. “In the last few days Cyprus came closest of any country to date to leaving the Euro in a disorderly fashion,” it says. “After a week of messy negotiation and flawed proposals, default and devaluation was avoided only though the imposition of what may well turn out to be very large losses on bank creditors.” Those losses will take the form of a one-off levy on deposits above the insured sum of 100,000 euros.