Helena Smith in Nicosia, Ian Traynor in Brussels, Miriam Elder and Jill Treanor
The Guardian, Monday 25 March 2013 21.24 GMT
Markets take fright as finance chief suggests Cyprus rescue could set the template for future eurozone bailouts
Laiki, one of the two largest Cypriot banks, is to remain closed until Thursday. Photograph: Milos Bicanski/Getty Images
Fears that bank accounts could be raided in any future eurozone bailouts spooked markets on Monday, as Cypriots prepared for their banks to reopen for the first time in over a week on Thursday following a deal to secure a €10bn lifeline.
Markets took fright after the head of the group of eurozone finance ministers indicated that the Cyprus rescue could be a template for similar situations. Cyprus is the first of five bailouts in the eurozone where depositors have been hit.
"What we've done last night is what I call pushing back the risks," Jeroen Dijsselbloem, the Dutch finance minister, told Reuters and the Financial Times after clinching an agreement for Cyprus. "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.
Bank of Cyprus and Laiki, the two largest domestic banks, will remain shut until Thursday while the latter is split into a good and bad bank and a levy – of potentially 40% – is imposed on accounts of more than €100,000.
A big percentage of those deposits belong to Russians. On Monday the Russian president, Vladimir Putin, said there would be a deal to rework the terms of a €2.5bn loan to the Mediterranean island, which had become attractive for its low tax regime and lax vetting laws.
Cyprus president Nicos Anastasiades made a televised address in which he admitted that measures would be in place to stop money pouring out of the banks when they reopen. "The central bank will implement capital controls on transactions. I want to assure you that this will be a very temporary measure that will gradually be relaxed," he said.
Markets were initially buoyed by news of the "painful" bailout for Cyprus, clinched late on Sunday night following threats by the European Central Bank to switch off liquidity to Cypriot banks, which, carried by international deposits, had grown to eight times the €17bn economy.
But markets reacted badly later in the day after Dijsselbloem's remarks. As markets tumbled, he issued a clarification insisting that bailout programmes were "tailor-made" and that "no models or templates are used".
Nevertheless, all markets erased their early gains to close down on the day. The FTSE 100 index lost 0.2% and the German stock market fell 0.5%. Bank shares fell across Europe while the euro, which had nudged up through $1.30 initially, fell back to below $1.29. US markets, which had largely shrugged off the Cypriot problem, were also lower, with the Dow Jones Industrial Average down over 70 points, 0.5%.
Cypriots had reacted to the agreement with European leaders with relief as it appeared that at least deposits below €100,000 had been spared the levy.
In the streets and cafes of Nicosia, and on TV chat shows aired in homes across the nation state, the feeling was that the country had been saved but at a high price.
Interior minister Sokratis Hasiko encapsulated the mood, describing the EU-IMF-backed bailout as the best of a bad range of choices.
"We had got to the point where we were discussing a [depositor] haircut of between 50 and 60%," he said, adding that the Cypriot parliament's rejection of the first accord, with its highly controversial levy on depositors big and small, had been hugely negative for the country's banks. "So this is the best we could get."
There were warnings the impact could reach beyond Cyprus, particularly with repercussions from Russia, where the prime minister, Dmitry Medvedev, said: "They are continuing to steal what has already been stolen." This was a phrase Lenin used to answer the allegation that the Bolsheviks were thieves. Russian officials have repeatedly compared the Cypriot bank levy to Soviet-era expropriation.
"For sure there is anger," said Marios Cosma, head of K Treppides, a firm that serves international clients, mainly rich Russians. "For the first time in Europe, you have a situation where depositors are being called to 'bail in'."
While Cyprus' banking sector has exploded, other countries have even larger banking sectors relative to GDP. Malta's and Luxembourg's banking sectors are relatively larger, more than 20 times' GDP in the case of Luxembourg. Malta's finance minister wrote an article in the Malta Times expressing concern about what would happen if it encounters similar problems in the eurozone.
In Cyprus there were calls for a referendum on the bailout package. "It is illegal and undemocratic," said Christos Tombazos, general secretary of the Pancyprian Federation of Labour. "We're talking about massive changes to the banking system. It should go to referendum for the Cypriot people to decide."
Russian officials attempted to assuage fears over Russian investments on the Mediterranean island. Russian Commercial Bank, a wholly owned subsidiary of state-owned bank VTB, would "not be affected or its losses will be insignificant", said Igor Shuvalov, a deputy prime minister.
The Bank of Cyprus is 9.7% owned by Dmitry Rybolovlev, a Russian based in Monaco whose wealth is estimated at $9.1bn according to Forbes.
One Russian oligarch, Alexander Lebedev, played down the amount he stood to lose in Cyprus as no more than $10,000. "It's not worth talking about," he said. "Cyprus was always a transit jurisdiction – money would pass through and then go to Lithuania, Latvia, Belize, Switzerland, everywhere. There are plenty of ways [to avoid capital controls], they can split accounts."
The multimillionaire owner of the Evening Standard and Independent expressed doubts that capital controls to be imposed by the Cypriot government in order to stem a bank run would work. "Certain schemes can be put into place," Lebedev said by telephone from Moscow. "This is how Cyprus was making money."
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