While Anastasiades Fiddled, Money Fled Cyprus



Money-fled-Cyprus

Delays and indecision by newly-elected Cypriot President Nicos Anastasiades’ government allowed a huge outflow of cash from the island’s banks even though they were closed and limits were placed on most withdrawals, the news agency Reuters reported.

In banknotes at ATM’s and exceptional transfers for “humanitarian supplies,” large amounts of euros fled the country before the Parliament voted 36-0 to reject an initial plan to confiscate part of even government guaranteed deposits, and after a bailout deal was secured with international lenders to secure the release of 10 billion euros ($13 billion) to prevent a collapse of the banks and economy.

European Union negotiators said they knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. “The amount the Cypriots mentioned … on a daily basis was much less than it was in reality,” the source said.

Reuters said that confusion over just how much money was pulled out of Cyprus’ banks showed how frantic Cyprus’ negotiation with international lenders were, and which led the government not to deal with the cash outflow. The state banks, except for Laiki which is being liquidated, are due to open again on March 26 but depositors over 100,000 euros will have 40 percent of their money seized by the government and capital controls preventing them from withdrawing the rest.

No one knows exactly how much money has left Cyprus’ banks, or where it has gone. The two banks at the center of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.

While ordinary Cypriots queued at ATM machines to withdraw a daily limit of 100 euros ($130) and credit card transactions stopped, other depositors used an array of techniques to access their money. Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

WHERE’S THE MONEY?

Chris Pavlou, who was Vice Chairman of Laiki until last week, told Reuters that while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions. German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

Big depositors, including wealthy Russians and Britons, whom the Cypriot president had sought to shield from a levy of any more than 10 percent on their holdings, will end up being far more severely burned – if their money is still there as the government admitted bondholders could lose everything.  Under the bailout deal, Cyprus will have to shut its second largest bank and inflict heavy losses on large account holders.

Deposits over 100,000 euros in both will be frozen and used to resolve the debts of the defunct Laiki and recapitalize Bank of Cyprus. Both banks were hurt by their exposure to Greek sovereign debt when bondholders were forced to take write-downs last year. By March 24, one participant in the talks told Reuters, Laiki Bank was just about empty of money although Pavlou disputed and said there was still about 2.5 billion euros ($3.21 billion) in the till. The bank’s market value in November of 2007 was 8.1 billion euros ($10.42 billion)

No figure was announced for the scale of the “haircut” on big depositors, but it will be nearer to 50 percent than to the 15 percent that Anastasiades rejected on March 15, participants in the negotiations said, speaking on condition of anonymity. Anastasiades, who broke his month-old campaign vow not to confiscate bank depositors money, at one point threatened to resign because the pressure was so much, it was reported.

But he then relented to the demands from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) after they called his bluff, saying that if he quit they would continue negotiations with the speaker of the Cypriot Parliament, next in line constitutionally, a participant in the talks said.

The confiscation was not exactly news as it had been talked about for months with Anastasiades’ predecessor, the Communist Demetris Christofias, who did not run for re-election and who had refused to implement the plan. “Christofias didn’t want to be the President who had signed a bailout with the troika,” an EU official said.

German Finance Minister Wolfgang Schaeuble said his government, which had put a boot on Anastasiades’ neck, got all that it wanted from him. “This is bitter for Cyprus but we now have the result that the (German) government always stood out for,” he said. An EU source though said the IMF and Germany had initially wanted to shut down the national Bank of Cyprus as well, leaving only one state financial institution Hellenic Bank.

European politicians, anxious to deflect criticism for having been party to an initial deal 10 days ago that would have imposed a levy on all small savers in Cyprus, rushed to say that Nicosia had only itself to blame. “To all those who say that we are strangling an entire people … Cyprus is a casino economy that was on the brink of bankruptcy,” French Finance Minister Pierre Moscovici said.

He said he had always opposed taxing deposits smaller than 100,000 euros, which are subject to an EU guarantee but only from bankruptcy, not from seizure by governments, it was said. Yet neither he nor other ministers or European Commission officials spoke out against the idea at the March 15 meeting, participants said.

Reuters said Cyprus’ biggest blunder was turning to Russia to be a savior, to restructure a 2.5 billion euros ($3.2 billion) loan granted in 2011 and put up more funds. The Russians, despite their fury that many wealthy Russians would lose billions, didn’t bite, even at the prospect of getting potential gas reserves that are under exploration off the island’s coast.

The European Commission and the ECB had quietly told the Russian Finance Ministry and central bank that any further loan from Moscow would just add to Cypriot debt and undermine the basis for an EU-IMF bailout, sources with knowledge of the exchange said.

Russian Prime Minister Dmitri Medvedev accused the EU of handling the Cyprus crisis “like a bull in a china shop.”. He and President Vladimir Putin complained to visiting European Commission President Jose Manuel Barroso that Moscow should have been consulted before the decision to impose a levy on depositors.

“It took more time for the Cypriots and the Cypriot authorities to fully understand what their options were and how deep the crisis was,” Jeroen Dijsselbloem, the Dutch chairman of Eurozone finance ministers, told Reuters in an interview.

“It’s hard for me to say what made the penny drop, I think it was probably because it was five to midnight, literally it was five to midnight, and we were not making much progress and we simply said to the Cypriots: ‘Look, we’re ready to help you, there’s 10 billion available, but you have to realize what the present situation is. You have to act now. Political choices have run out.’ There was a deadline. And that worked.”