Since the early hours of Saturday morning last, Cypriot bank account holders have been unable to go online, go into a branch or telephone or fax their banks with instructions to electronically transfer funds. Cash withdrawals are limited to €400 per 24 hours at ATMs and some Cypriot ATMs have run out of cash. Counter withdrawals are not possible since the banks have been closed since last Friday evening. Outside Cyprus, people can use their debit cards to withdraw cash and there doesn’t seem to be any special limit of €400 per day.
The latest from Cyprus is that banks will not re-open until next Tuesday, 26th March 2013, at which point, Cypriot bank account holders will have seen the suspension of the normal operation of their accounts for 10 continuous days, unprecedented in the EuroZone.
The Cypriot banking system is dead, it’s just the phony banking system where banks are closed, electronic transfers suspended and limited ATM service masks the death and it will just take another few days for the death to be fully recognised.
If the banks do re-open next Tuesday, then within 24 hours, the Cypriot retail banking system will have practically collapsed. Capital controls under Article 65 of the Treaty of the Functioning of the EU will be nigh-impossible to implement in a single euro country without economic collapse; the fact that the Cypriot economy relies on offshore banking, insurance and trusts makes capital controls particularly difficult in Cyprus. Human behavior will push people into withdrawing the maximum possible, even with capital controls.
Ordinary Cypriot bank account holders have been threatened with being repaid between 90-93c in the euro on their deposits. Amendments have been suggested to the levy as announced last Saturday, which would reduce the burden on small depositors but that would need to be made up with an increased burden on larger depositors. Cypriot parliamentarians rejected the proposed levies on deposits, but the mask has slipped and people now know what is possible in current circumstances.
For households, it will be safer withdrawing the lot and sticking it in a safe or mattress, leaving behind in the bank the minimum sum to provide you with the utility of not carrying large wads of cash around.
Larger foreign depositors, believed to comprise one third of c€70bn of Cypriot deposits, would be crazy to keep their deposits in Cyprus, so you can expect a mass exodus to core EU countries and Switzerland. After all, serious nations including Germany and France have sought a deal which would blithely see them losing 10% of their cash. That genie is now out of the bottle.
Even if proposals to make up the bailout shortfall – remember it was hoped that depositors would cough up €5.8bn which alongside €1.4bn of privatization and a €10bn EU bailout would provide Cyprus with the €17bn it needs – can be advanced on the short-term use of Cypriot pension funds, a Russian loan or bonds can be fashioned and issued and secured on future oil and gas revenues, it doesn’t matter at this point. Human behavior and fears, not rational economics, will be to the fore as funds flow out of Cypriot banks when they next open. People will wait and see from the sidelines how this pans out, but mean-time, they will feel safer having their cash at hand.
The survival of the banking system from the ravages of a bank run can only be countered by a ramping up of lending from the ECB which will be needed to replace departing deposits. At present, the ECB has €10bn of lending to Cypriot banks, compared to €90bn in Ireland. Next Tuesday, the ECB will face a defining dilemma – lend more to Cyprus, probably additional 10s of billions or pull the plug and collapse the Cypriot banking system. If the Cypriot banking system collapses, then the country will need return to the Cypriot pound – Cyprus can’t just let insolvent banks fail, it has given depositors a €100,000 guarantee and there won’t be the cash available to repay depositors. Contagion effects are uncertain, though are likely to be more limited than Greece’s shockwaves.
But remember the ECB is not some detached magical source of money – Ireland contributes 1.6% to its funds, and we’ll pick up 1.6% of any losses in Cyprus.
When will ordinary Cypriot businesses and households be tempted back into the Cypriot banking system?
Probably when ordinary businesses and households are confident Cypriot state finances are sorted out, and if there is a bailout, that the conditions of the bailout are all specified. Given the behavior of the EU and ECB last week, confidence will probably only return when Cyprus has control of its own currency again. Remember Cypriots have stared their partners in the eyes, as those same partners demanded mean-spirited changes to the corporate tax rate as well as raids on deposits which run counter to the commitment to detach sovereign from banking debt.
And what about big international depositors? They’ve had a wake-up call, and Cyprus can wave goodbye to these funds for some years to come. We refer to having crossed the Rubicon in the past week, but it’s more serious – the 2013 EuroZone of Germany and France has approved measures which have broken trust forever, undermined any sense of solidarity and made EuroZone deposit guarantees as worthless as the paper they’re written on.