Friday

19th Aug 2022

Cypriot banks stay closed amid fears of bank runs

  • Laiki bank logo. Breugel: 'a Cypriot euro is not a euro anymore' (Photo: kassandrapoised)

Cyprus' banks will remain shut until Thursday (28 March) as lawmakers scramble to avoid a bank run when they reopen.

Under the deal reached between the Cypriot government and the EU on Monday, Cyprus' two largest banks, the Bank of Cyprus, and the Popular Bank of Cyprus (also known as Laiki bank) will take the brunt of the burden.

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Both face drastic restructuring and will provide the bulk of a €7 billion contribution from Cyprus requested by eurozone ministers in exchange for a €10 billion bailout.

Savings under €100,000 will be protected.

But the Cypriot rescue package is the first time that bank depositors are being hit.

Wealthy clients at the Bank of Cyprus are expected to get a haircut of up to 40 percent of savings.

Meanwhile, deposits worth €4.2 billion are expected to be wiped out in Laiki, which is to be wound down, with assets transferred to a "good" and a "bad" bank.

During emergency sessions in Cyprus' House of Representatives last Friday, MPs voted to introduce capital controls restricting how much money people can withdraw from ATM's and how much they can wire via electronic transfers, in a desperate bid to avoid bank runs.

Cypriots can take a maximum of €100 and €120 per day from the Laiki bank and the Bank of Cyprus, respectively.

People caught trying to take more than €10,000 out of the country will have it confiscated.

In a statement released on Monday the Cypriot central bank said the continuing bank lock-down, which started last week, is needed to ensure the "smooth functioning of the whole banking system."

For its part, the European Central Bank (ECB) said the same day that it will keep its life support machine for Cypriot banks, the Emergency Liquidity Assistance (ELA) programme, switched on.

"Today, the [ECB] governing council decided not to object to the request for provision of Emergency Liquidity Assistance by the central bank of Cyprus," it noted in a statement.

The ECB had earlier made ELA access conditional on a Cypriot bailout deal.

"Now steadfast implementation [of the bailout terms] is key for Cyprus to regain access to financial markets and return to growth as soon as possible … [We] will continue to monitor the situation closely," the ECB added.

The Cypriot bailout was initially welcomed by markets.

But some analysts warn that capital controls, which have never been imposed in the eurozone before, have implications for the relative value of the euro in different countries.

Guntram Wolff, director of the Brussels-based Bruegel think tank, noted that "The most important characteristic of a monetary union is the ability to move money without any restrictions from any bank to any other bank in the entire currency area."

He added: "If this is restricted, the value of a euro in a Cypriot bank becomes significantly inferior to the value of a euro in any other bank in the euro area. Effectively, it means that a Cypriot euro is not a euro anymore. By agreeing to this measure, the ECB has de facto introduced a new currency in Cyprus."

Eurozone agrees Cyprus bailout 2.0

Cyprus' Laiki bank is to be wiped out. Depositors in Bank of Cyprus will also take a hit under a new bailout deal. But details remain sketchy.

Cyprus MPs pass bank laws, start bailout talks

Cyprus edged back from the brink of bankruptcy on Friday after MPs agreed to a series of emergency reforms - including capital controls - in a bid to avoid financial meltdown.

EU banks closed 5,500 branches in 2012

More than 5,500 bank branches were shut down last year across the EU, as the bloc's retail banks continued to feel the economic crisis.

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Cyprus' banks opened without panic on Thursday after a 10 day lockout as the government struggled to agree a €10 billion rescue package.

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