After European Union finance ministers cut a deal late last Sunday to rescue Cyprus, it appeared a healing period was in store for the island’s troubled finances. World markets paused, then watched the Dow and S&P 500 surge to record highs by the close of this abbreviated week of trading. Yet Bank of Cyprus depositors learned Saturday that they might lose far more than initially disclosed – up to 60 percent in the worst-case scenario.
Considering the proposed 6.75 percent haircut for small depositors drew the ire of Cypriot citizens, this amount is likely to cause tremendous waves of unrest in the country, the EU and beyond (Russian investors hold large stakes in Cyprus’s overgrown banking industry). Cyprus bank officials disclosed that 37.5 percent of deposits over 100,000 euros would become shares of Bank of Cyprus assets. An additional 22.5 percent would become part of an emergency fund.
As for the 40 percent left of the largest deposits at the Bank of Cyprus, it would have interest added to it – which won’t be paid unless the bank performs well in the coming period. These amounts are much higher than originally predicted. Investors at Cyprus Popular Bank (Laiki), the nation’s second-largest, might be forced to surrender even more of their deposits. With state capital controls in place, depositors have few options at their disposal.
Though much pre-bailout talk revolved around Russian investors with large deposits in Cyprus, schools and other local residents with money in the top two Cyprus banks could be hit just as hard. The Bank of Cyprus and Popular Bank hold the deposits from large schools as well as the proceeds from home sales. Investors in the real estate market could face capital losses not seen since the 2001-2002 collapse of Argentina’s financial system.
Reports suggest that the capital controls – which limit daily withdrawals, total amounts withdrawn by traveling depositors and even credit card limits — could stay in place for a month or longer. The markets are likely to respond less favorably to the latest news out of Cyprus, where it had appeared the issue was settled. The major stock indices will be tested starting Monday.