Bank of Cyprus' Big Depositors to Lose Up to 60 Percent of Savings

Cyprus crisis
(AP Photo/Petros Giannakouris)
By MENELAOS HADJICOSTIS

NICOSIA, Cyprus -- Big depositors at Cyprus' largest bank may be forced to accept losses of up to 60 percent, far more than initially estimated under the European rescue package to save the country from bankruptcy, officials said Saturday.

Deposits of more than 100,000 euros ($128,000) at the Bank of Cyprus will lose 37.5 percent in money that will be converted into bank shares, according to a central bank statement. In a second raid on these accounts, depositors also could lose up to 22.5 percent more, depending on what experts determine is needed to prop up the bank's reserves. The experts will have 90 days to figure that out.

The remaining 40 percent of big deposits at the Bank of Cyprus will be "temporarily frozen for liquidity reasons," but continue to accrue existing levels of interest plus another 10 percent, the central bank said.

The savings converted to bank shares would theoretically allow depositors to eventually recover their losses. But the shares now hold little value and it's uncertain when -- if ever -- the shares will regain a value equal to the depositors' losses.

Emergency laws passed last week empower Cypriot authorities to take these actions.

Analysts said Saturday that imposing bigger losses on Bank of Cyprus customers could further squeeze already crippled businesses as Cyprus tries to rebuild its banking sector in exchange for the international rescue package.

Sofronis Clerides, an economics professor at the University of Cyprus, said: "Most of the damage will be done to businesses which had their money in the bank" to pay suppliers and employees. "There's quite a difference between a 30 percent loss and a 60 percent loss." With businesses shrinking, Cyprus could be dragged down into an even deeper recession, he said.

Clerides accused some of the 17 European countries that use the euro of wanting to see the end of Cyprus as an international financial services center and to send the message that European taxpayers will no longer shoulder the burden of bailing out problem banks.

But German Finance Minister Wolfgang Schaeuble challenged that notion, insisting in an interview with the Bild daily published Saturday that "Cyprus is and remains a special, isolated case" and doesn't point the way for future European rescue programs.
Europe has demanded that big depositors in Cyprus' two largest banks -- Bank of Cyprus and Laiki Bank -- accept across-the-board losses in order to pay for the nation's 16 billion euro ($20.5 billion) bailout. All deposits of up to 100,000 are safe, meaning that a saver with 500,000 euros in the bank will only suffer losses on the remaining 400,000 euros.

Cypriot officials had previously said that large savers at Laiki -- which will be absorbed in to the Bank of Cyprus -- could lose as much as 80 percent. But they had said large accounts at the Bank of Cyprus would lose only 30 to 40 percent.

Asked about Saturday's announcement, University of Cyprus political scientist Antonis Ellinas predicted that unemployment, currently at 15 percent, will "probably go through the roof" over the next few years.

"It means that [people] ... have to accept a major haircut to their way of life and their standard of living. The social impact is yet to be realized, but they will be enormous in terms of social unrest and radical social phenomenon," Ellinas said.

There's also concern that large depositors -- including many wealthy Russians -- will take their money and run once capital restrictions that Cypriot authorities have imposed on bank transactions to prevent such a possibility are lifted in about a month.

Cyprus agreed on Monday to make bank depositors with accounts over 100,000 euros contribute to the financial rescue in order to secure 10 billion euros ($12.9 billion) in loans from the eurozone and the International Monetary Fund. Cyprus needed to scrounge up 5.8 billion euros ($7.4 billion) on its own in order to clinch the larger package, and banks had remained shut for nearly two weeks until politicians hammered out a deal, opening again on Thursday.

But fearing that savers would rush to pull their money out in mass once banks reopened, Cypriot authorities imposed a raft of restrictions, including daily withdrawal limits of 300 euros ($384) for individuals and 5,000 euros for businesses -- the first so-called capital controls that any country has applied in the eurozone's 14-year history.

The rush didn't materialize as Cypriots appeared to take the measures in stride, lining up patiently to do their business and defying dire predictions of scenes of pandemonium.

Under the terms of the bailout deal, the country' second largest bank, Laiki -- which sustained the most damaged from bad Greek debt and loans -- is to be split up, with its nonperforming loans and toxic assets going into a "bad bank." The healthy side will be absorbed into the Bank of Cyprus.

On Saturday, economist Stelios Platis called the rescue plan "completely mistaken" and criticized Cyprus' euro partners for insisting on foisting Laiki's troubles on the Bank of Cyprus.

____

AP business correspondent Geir Moulson in Berlin and APTN reporter Adam Pemble in Nicosia contributed.


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dworkenlaw1

This is reminicent of the crash of '29, where economic fear
lead to withdraws from banks; leading to 'temporary' closing
of banks; leading to wholesale runs on banks; leading to
the collapse of the entire, national economy.

The way the Euro is going, the EU could easily be next
in this type of mass crash. Germany is not strong enough
to hold up all the weaker nations, and a falling tide lowers ALL boats.
The EU would be smart to disband for the foreseeable future.
Some economies will fail, but it is easier to fix those leaks one
at a time, than to try and fix a deep rip through the hull of the
entire boat.

Finally, the US is suffering in some ways, but we have safeguards
to block this happening again like in the '20's. Instead of mass failure,
now we simply have deeps cuts in social programs putting the
burden back on the poor. Keeps the ship afloat but eventually the
overall quality of EVERYONE'S life is in the toilet. And who wants to
ride on a garbage scow?

Thanks for listening.

Patrick

March 31 2013 at 11:34 AM Report abuse rate up rate down Reply
Larry

Don't think that Obama isn't looking at this situation with envy...class warfare at its best.

March 31 2013 at 9:24 AM Report abuse rate up rate down Reply
Marcie

Think Obama will bail THEM out? Why not. He just handed 150 million over to Egypt and 500 billion to Syria! All the while his own country banks are keeping loan default houses in limbo. What a hero

March 31 2013 at 9:17 AM Report abuse rate up rate down Reply
hawkihot

The press is beyond stupid and so is our current government leaders

March 31 2013 at 9:06 AM Report abuse rate up rate down Reply
dkblue0007

Bitcoin is the big winner here.

March 31 2013 at 6:42 AM Report abuse rate up rate down Reply
stevemontani

Don't worry our government would never let this happen to us.............You guys stay home. I have to get down to the bank and ........well, you guys just stay home and relax.

March 30 2013 at 8:53 PM Report abuse rate up rate down Reply
john foote

What's stopping that from happening here?

March 30 2013 at 1:03 PM Report abuse rate up rate down Reply
1 reply to john foote's comment
stevemontani

they have to practice all over Europe first. This is a HUGE story and it has two posts? That rediculous DOMA case has thousands, I think the government dosent have much to worry about.

March 30 2013 at 8:55 PM Report abuse rate up rate down Reply