Cyprus scrambles for bailout, but Cypriots fear damage already done

Cyprus’s leaders engaged in frantic, 11th-hour talks to avoid a collapse of the Mediterranean island’s banking system yesterday, flying to Brussels to try to secure a crucial 10 billion euro ($13 billion) bailout from international lenders.

Nicos Anastasiades, the Cypriot president, and Michalis Sarris, his finance minister, flew to Brussels to try to hammer out a deal to contain the country’s chronic debt crisis.

It was a race against time – without a deal by the end of Monday, the European Central Bank (ECB) says it will cut off emergency funds to Cypriot banks, precipitating their collapse and potentially forcing the country out of the euro.

But back home, many Cypriots feared they were already staring into the face of economic ruin, regardless of the outcome of the talks with the rest of the euro zone. The island may be known for its golden beaches and cheap package holidays, but a dark cloud of despondency has settled over its one million inhabitants.

Cypriots have been in shock ever since it was suggested last week that the government mount a one-off raid on bank accounts to help raise 5.8 billion euros ($7.5 billion) – a condition of receiving the 10 billion euro bailout from the European Union, ECB, and International Money Fund, the so-called “troika” of lenders. In the end Cypriot MPs voted down the idea of confiscating up to 9.9 percent of deposits over 100,000 euros ($130,000) and 6.75 per cent on accounts holding less than that amount. 

But a different version of the idea was raised again over weekend, with suggestions that the Cypriot government would impose an unprecedented 20 percent levy on bank deposits of 100,000 euros or more held with the Bank of Cyprus, the island’s largest lender.

Whatever the outcome of the crisis talks in Brussels, many Cypriots said that the prospect of bank accounts being raided had destroyed all confidence in the island’s lucrative banking and financial services industry.

Companies with money already in Cypriot banks would withdraw the funds as soon as they could, while new investors would avoid the island like the plague.

“The troika has really shaken the system,” says professor Hari Tsoukas, an economist from the University of Cyprus. “I think the future could be terribly bleak. It’s going to have huge knock-on effects for the whole economy.”

Ioanna Constantinou, who works in the financial services industry in Nicosia, the capital, says: “Who is going to want to bring their money to Cyprus now? The banking sector is finished, we have lost all credibility.”

The European Union is supposed to guarantee bank deposits of up to 100,000 euros. Tearing up that accord has terrified Cypriots and has frightening implications for the rest of the EU.

“The only question now is, who’s next? Italy, Spain?” says Simos Angelides, a lawyer who once stood for election for the European Parliament but whose enthusiasm for the European project is now in tatters. “This is unprecedented. We are the guinea pigs – they are testing the model here before applying it to other countries. No one’s money is safe in Europe anymore.”

Cypriots fear that as the bank levies bite, raking in billions of euros, businesses and big investors will have to start laying off staff, leading to high levels of unemployment.

Cypriots are likening the present crisis to the last great catastrophe that befell the island – an invasion by Turkey in 1974.

Turkish forces managed to grab the northern half of Cyprus and split the island – a division that remains to this day, with Nicosia one of the last partitioned cities in the world.

Since then, the Greek, southern part of Cyprus has enjoyed spectacular growth thanks to its financial services and banking sector.

It has attracted investment from around the world, but particularly from Russians, who are estimated to have more than 20 billion euros ($26 billion) in deposits in the island’s banks.

Cypriots now fear that Russians and others will try to withdraw their money, contributing to a devastating downward economic spiral.

“The idea of dipping into bank accounts is the ultimate taboo,” says John Leonidou, a reporter with The Cyprus Weekly newspaper. “As a commercial center, we’ve been destroyed. We’ll have to pull off a miracle to bring back our credibility.”

Critics say the Cypriots have only themselves to blame, having becoming far too reliant on the financial services industry, and the money it accrued from sometimes shady origins.

Assets held by Cypriot banks are nearly eight times the size of the island’s economy, which is worth around 17 billion euros ($22 billion) a year.

There was a particularly blunt message on Sunday from the French finance minister, Pierre Moscovici, who told a French television channel: "To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy.”

But the islanders feel they have been betrayed by their EU partners, and point out that the bailout they need is a fraction of the money given to Greece in the last two years.

Outside the dazzling white parliament building in Nicosia, protesters stuck placards to a fence. "Europe You Failed Me", said one, while another read: "Draghi is Dragging Us Down," a reference to Mario Draghi, the head of the European Central Bank.

The government imposed restrictions last week on how much money people could withdraw from cash machines, limiting it to just 260 euros ($338) a day. With so little money in circulation, the economy is slowly grinding to a halt.

The banks will be closed on Monday, a public holiday, and are supposed to reopen on Tuesday, albeit under stringent capital controls to avert a massive exodus of money overseas. But Cyprus was awash with rumors that the reopening might not happen because bank employees, fearing that a reform of the banking system will jeopardize their jobs, were planning to go on strike.

“If that happens, there will be a total crash of the economy,” says Angelos Lemonaris, the owner of a cafe which overlooks the massive, Venetian-built stone walls that encircle Nicosia’s old town. “It’s only going to get worse.”