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.
NAMA Wine Lake 
I absolutely agree with your piece. While the short term ramifications for the rest of the EuroZone may be limited, this may well provide a longer term contagion, ordinary people across Europe are shocked to see that they too can have savings and money supply impacted at the whim of Brussels. So much for solidarity alright, my savings are going outside of Europe…
Have we entered the terminal phase of the Euro?
The correct procedure would be to let the two main banks go.
This would wipe out shareholders (small change by now anyway), the
bond holders (apparently negligible amounts, too, as there were always enough deposits the banks could use), as well as any deposits above 100,000 Euros. This clear cut solution was apparently refused by Cyprus in a desperate attempt to save what remains of their business model. If viewed in this way the haircut of depositors between 6.75 and 9.99 per cent doesn’t look so bad does it? It is indeed difficult to see why the taxpayers of other countries should be first in line. After all, cypriot banks were paying on average 5 percent interest on deposits, i.e. the depositors would have seen 1-2 years of interest being taken back. They should have known/been told that there is currently no risk free investment with a 5 percent return.
IMO there would have been a much simpler solution. http://gqjftw.blogspot.de/2013/03/a-simpler-way-to-solve-crisis.html
The reason, that the Cypriot banks paid so much is that they have been bankrupt for months. In the US the FDIC woul have dismantled the banks a long time ago, because paying so much interest in a low yield environment turns a broken bank into a ponzi sceme, were it desperately tries to get in new money, while using it to pay the interest on older money. This is exactly the point the FDIC steps in.
@S.Sint the author here,who is widely read and respected agrees with you…as do quite a few other people.However…anti Russian,xenophobic or racist get bandied about if you suggest that depositors over a 100,000 for most part were yield chasing tax dodgers/evaders,as opposed to ‘widows and orphans”
“There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications. By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?
The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.”
http://dealbook.nytimes.com/2013/03/18/a-bank-levy-in-cyprus-and-why/
“There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications.”
If you read my post from yesterday, you would have gleaned that Spain is already setup to do exactly what is suggested for Cyprus banks [steal deposits], both on the national level and local autonomous level. The law has been passed, counter to EU banking regulations. The Spanish government indicates that it will only be a small amount confiscated [at first]. Well, now everyone can rest at ease.
@Houndini i actually did,today it appears instead of 0.0 its now 0.2% !
Here is the few bob it would raise-oh GS recommends transferring it quickly,please contact your GS advisor asap!
http://www.businessinsider.com/goldman-warns-of-new-deposit-tax-base-in-euro-zone-2013-3
http://www.zerohedge.com/news/2013-03-19/spain-preparing-its-own-deposit-levy
I would like to reply to the riddle about the comparison between returns over the last year in US versus the Cypriot bank “tax”. What you are describing is what is called a market event or risk. I know this term is somewhat archaic in today’s centrally planned Fed World. However, what the EU wants done to Cypriot depositors with written contracts is nothing more than theft. Just to make things crystal clear.
One element that might raise its head, should the Russians get a deal on Aegean gas, is Turkey, which still disputes Cypriot ownership of a significant part of the discovery area. Expect a “Sorry, not so fast!” from Ankara any day now.
@Houdini 5% was never risk free v 1% ‘guaranteed’……its still evolving onto Plan C.RyanAir the biggest airline in Cyprus closed all its bank AC’s a year ago,this has been well signposted.
Perhaps not the ‘tax’ below 100 but the banking issues yep.
No such thing as a free lunch and all that….
Latest from WSJ-apols. its behind paywall but from ‘on the ground’ reporter who is excellent.
“Experts from the troika—the European Commission, the European Central Bank and the International Monetary Fund—were briefed Wednesday on Nicosia’s Plan B to secure a €10 billion ($12.93 billion) bailout after Parliament resoundingly rejected the deposit-levy plan attached to the original agreement.
Cypriot authorities proposed turning pension-fund assets into government bonds in a bid to raise about €4.2 billion of the €5.8 billion ”
Hope they have a Plan C,Plan B just rejected !
http://online.wsj.com/article/SB10001424127887324103504578372092101021064.html?mod=rss_world_markets&cb=logged0.09616768197156489
“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.”
I always enjoy this story:
http://www.independent.ie/irish-news/hospital-staff-shocked-by-patient-who-had-60000-strapped-to-body-26727808.html
His equivalents in Cyprus have had a good week.
@Otto, actually getting hard news out of Cyprus at present is remarkably difficult given the large international press corps that is supposed to be reporting on the crisis there.
According to @MatinaStevis, standing orders and direct debits have all been suspended since last Friday evening.
There is patchy reporting on what the ATMs are doing. There are reports today that ATMs are re-stocked. CNN was reporting on Monday that Cypriots could withdraw a maximum of €400 per day.
We don’t know what can be withdrawn with Cypriot debit cards overseas – I seem to recall the Quinns were able to withdraw 1000s in the space of 24 hours.
There was also no reporting on sales of safes in Cypriot media yesterday when I did a search which is surprising but maybe people are actually waiting for banks to re-open to see that there is actually cash to put in any newly-purchased safe which afterall will set them back a couple of hundred euro including installation.
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