Euro threat precipitates flight of capital from Cypriot banks
Sources say lenders haemorrhaged €1 billion ($A1.3 billion) in deposits over the first two weeks of February, heightening fears that even talk of "haircuts" is deepening the banking crisis as rescue talks drag on between the European Union and the International Monetary Fund and the island's new leaders. The Bank of Cyprus reported deposit losses of €1.7 billion in January.
Brussels has warned against haircuts for depositors, a drastic move avoided in bailouts for Greece, Ireland, and Portugal.
Cypriot Finance Minister Michael Sarris told eurozone colleagues this week that such action would shatter confidence and set off a fresh round of the debt crisis.
"There is no way we can entertain the idea of any kind of haircut to any kind of deposits. This would be an accident in the eurozone not caused by markets, but a self-inflicted wound, a self-inflicted catastrophe, not only for Cyprus, but for the eurozone and perhaps even beyond."
The crisis in Cyprus is now deepening on every front. The jobless rate hit 22 per cent in February. The country will run out of money to pay its bills in May. An internal report by Brussels says the bank rescue costs may push public debt to 145 per cent of GDP, implying that debt relief will be needed.
Since European leaders have vowed not to repeat the mistake made in Greece where they set off a broader crisis by imposing wipe-out losses on investors, this means that the burden may fall on taxpayers in Germany and the European Monetary Union core.
The Cypriot crisis has been neuralgic in Germany ever since a leaked report alleged that the island was a haven for Russian organised crime. Nicosia agreed this week to a money-laundering probe but it is unclear whether this will placate critics in the Bundestag. Sigmar Gabriel of the Social Democrats said the business model of Cyprus was based on "Russian oligarchs, Serb mafias, and tax evaders".
Bankers say the attacks on Cyprus are deeply confused. Most of the Russian money is in Cypriot branches of Russian banks that are solid, or in large British banks.
"There is no chance that they will go after these banks because it would be illegal and amount to expropriating the Russian state," one banker said.
The Cyprus Mail says the outgoing Communist government whipped up hysteria against the banks to divert blame from its own mismanagement.
Frequently Asked Questions about this Article…
Capital flight accelerated after eurozone politicians began talking about possible losses for bank depositors. Sources in the article say lenders lost about €1 billion in deposits in the first two weeks of February, the Bank of Cyprus reported €1.7 billion of deposit losses in January, and overall outflows may have reached roughly 12% of Cyprus’s GDP over the past month.
A ‘haircut’ means forcing depositors or investors to accept losses on their holdings. The article says talk of haircuts has itself worsened the banking crisis. Brussels has warned against imposing haircuts on depositors—something avoided in past bailouts for Greece, Ireland and Portugal—and Cyprus’s finance minister argued that any depositor haircut would shatter confidence and risk a wider eurozone crisis.
Deposit outflows and talk of depositor losses increase risk and uncertainty for savers and investors with exposure to Cypriot banks. The article explains these flows are straining banks, deepening the crisis and making rescue talks more difficult. European leaders’ reluctance to impose depositor haircuts suggests the burden may fall instead on taxpayers in core eurozone countries, which is relevant to investors watching sovereign debt and regional stability.
The Bank of Cyprus reported €1.7 billion of deposit losses in January, which signals significant depositor withdrawal and pressure on the bank’s funding. The article doesn’t provide full solvency details, but large deposit outflows are an indicator of stress that everyday investors should monitor alongside official rescue negotiations and any public statements from regulators.
EU officials and the International Monetary Fund are involved in rescue talks, but the article notes those discussions are dragging on. Brussels has publicly warned against depositor haircuts and an internal report cited in the article warns that bank rescue costs could push Cyprus’s public debt much higher, implying debt relief or other measures will be needed.
The article highlights concerns about contagion: Cyprus’s finance minister warned that haircuts would be a ‘self‑inflicted catastrophe’ for the eurozone. While leaders have vowed not to repeat mistakes that triggered wider crises in the past, the deepening of Cyprus’s crisis—rising public debt projections and banking stress—poses a risk that investors and policymakers are watching closely.
A leaked report alleged Cyprus had been a haven for Russian organised crime, prompting Nicosia to agree to a money‑laundering probe. The article notes politicians in Germany raised strong concerns, but bankers argue much Russian money sits in Cypriot branches of Russian banks or in large British banks. One banker in the article said targeting those banks would be illegal and akin to expropriating the Russian state.
The crisis is deepening across the economy: the jobless rate rose to 22% in February, officials warned the country could run out of money to pay its bills by May, and an internal Brussels report suggested bank rescue costs could push public debt to around 145% of GDP, implying debt relief may be needed. The article also mentions domestic political tensions, with media and politicians trading blame over the crisis.
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