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…
The article says capital flight accelerated after eurozone politicians began threatening losses for bank depositors (so-called 'haircuts'). That political talk appears to have spooked customers: lenders reportedly lost about €1 billion in deposits in the first two weeks of February and the Bank of Cyprus reported €1.7 billion of deposit losses in January, with overall outflows possibly reaching about 12% of Cyprus's GDP over the past month.
In the article 'haircut' refers to proposals for imposing losses on bank depositors as part of a rescue. Eurozone politicians floated the idea, which helped trigger capital flight, but Brussels warned against haircuts for depositors and Cypriot officials publicly rejected them, saying such a move would shatter confidence and risk a wider crisis.
According to sources cited in the article, Cypriot lenders lost roughly €1 billion in deposits during the first two weeks of February, and the Bank of Cyprus reported €1.7 billion in deposit losses in January. Those outflows are a major factor deepening the banking and sovereign stress on the island.
The article highlights serious domestic strains: the unemployment rate hit 22% in February and Cyprus was reported likely to run out of money to pay its bills in May. An internal Brussels report warned that bank rescue costs could push public debt to about 145% of GDP, implying the need for debt relief—factors that raise country and bank risk.
The article notes European leaders vowed not to repeat the approach used in Greece where investors took wipe-out losses, so if depositors are protected the burden of a rescue may fall on taxpayers in Germany and the eurozone core, according to the reporting.
A leaked report alleged Cyprus was a haven for Russian organised crime, which intensified scrutiny. Nicosia agreed to a money‑laundering probe and German politicians criticised the island's business model; bankers counter that much Russian money is actually held in branches of Russian banks or large British banks, adding confusion to the debate and investor concerns.
Based on the article, investors should monitor official statements from eurozone institutions and Cypriot authorities about deposit protection or haircuts, data on deposit outflows and bank losses, and progress in EU–IMF rescue talks—because political decisions and market reactions are driving the crisis and influencing bank stability.
The article quotes the Cypriot finance minister warning that haircuts would be a 'self‑inflicted catastrophe' for the eurozone and perhaps beyond. It also notes that political decisions and capital flight can deepen banking crises and create contagion risk, so international investors should watch how eurozone policymakers resolve the issue.
Call 1300 880 160
Start a chat
Schedule a call
