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By Shavasb Bohdjalian
Certified Investment Advisor and CEO of Eurivex Ltd.
As the government finalized the EU bailout terms and the IMF said it had reached an initial agreement with Cyprus to unlock its portion – about EUR 1 bln – of a EUR 10 bln bailout for the country, one would expect that the authorities here would immediately take steps to further relax the capital movement restrictions.
Contrary to expectations, the authorities decided to extend the severe capital restrictions for another week, which in layman’s terms means an indefinite period, giving rise to rumours that the measures will lead to a deposit haircut at Cooperative Credit Institutions and other banks.
President Nicos Anastasiades and the Central Bank of Cyprus swiftly quashed the rumours, but most Cypriots are most likely to believe the rumours rather than their own president who unfortunately has lost credibility.
Many now believe that Anastasiades made a serious error when before the Eurogroup meeting he and his now departed Finance Minister continued to stress that a deposit haircut was no longer on the agenda and it was a “red line” that would be defended at all cost.
After the deposit haircut, who will believe him again? So despite the President insisting that there would be no haircut at the Coops or at other banking institutions, the majority of the public still believes that such a haircut is a possibility, otherwise why is the Central Bank still maintaining the crippling capital movement restrictions?
Instead of ring-facing the problem to Bank of Cyprus and Cyprus Popular Bank, the tough and unjust capital restrictions imposed on all banks is causing tremendous hardship for thousands of businesses that are now forced to curtail operations, proceed with layoffs and even risk closure.
In order to raise money to recapitalize the two ailing banks, the government decided to close Cyprus Popular Bank and radically restructure Bank of Cyprus, which in the process means that CPB’s uninsured depositors will probably take losses of as much as 80% of their holdings over the guaranteed limit of EUR 100.000 and Bank of Cyprus depositors stand to incur losses of as much as 60% over the limit. Meanwhile, the government promised to implement the bailout agreement leading to spending cuts and tax increases equal to more than a tenth of our EUR 17 bln a year economy through 2018.
In addition to these measures, the government also decided to impose capital restrictions covering not only BOC and CPB, but all other foreign banks as well as healthy local banks. But if all BOC/CPB deposits exceeding EUR 100.000 are blocked, no deposit at any Cyprus based bank can be broken and when they mature, only 10% can be withdrawn and the rest automatically renewed for another month, then one is justified to ask as to the real purpose of the capital restrictions imposed on current accounts and if it has been done deliberately to curtail business activity?
The measures are crippling the rest of the economy and has resulted in an effective shutdown, which will push Cyprus’ economy into a double-digit-percentage (with first estimates talking of 13%) contraction this year.
Such a depression will lead to another 30.000 people joining the unemployment ranks this year on top of 40.000 already unemployed, which means all the government’s revenue targets will be missed by a wide margin.
Since President Anastasiades promised civil servants that there will be no further reductions in salaries – even though in the private sector salaries are being cut from 15% to 50% – then it’s obvious that in most certainty, come September or even sooner, the Troika will demand additional cost cutting measures so that Cyprus remains within the stated deficit targets.
If there will be no additional salary cuts in the civil service and the ability of the government to raise taxes is restricted because of the state of the economy, where else will the government turn to in order to raise the new additional revenue to qualify for continued Troika funding? This is why people listen to speculation that the capital restrictions are in place so that if necessary, they can proceed with a 2nd deposit haircut, which will be extended to all banks.
If the likes of Eurobank, Hellenic, Piraeus, CDB and USB as well as the Coops are adequately capitalized and they have performing loans, which they can pledge to the Central Bank and secure funding from ELA, then why not lift the restrictions and allow the remaining banks to resume normal operations?
The sooner capital controls are lifted, the sooner stability and confidence will return to Cyprus, otherwise the public will believe the rumours rather than the people supposedly running the country.
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(Eurivex Ltd. is a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nomad and by the Vienna Stock Exchange to act as Listing Agent for listings of shares, bonds and funds. The views expressed above are personal and do not bind the company and are subject to change without notice)
