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Returning to the pound will isolate Cyprus in a geopolitical context

26 March 2013 / 22:03:13  GRReporter
4950 reads

Victoria Mindova

Banks in Cyprus have not opened on the first working day of the week. Their branches in Greece have also remained closed despite the promises of the Cypriot government that the activity of the financial system will be restored on Tuesday, 26 March. After almost nail-biting negotiations, the lenders and the Cypriot government have reached an agreement on the basic framework of the bailout to Cyprus. However, details on the deal have not been announced. What the authorities have announced in the public space is that the largest Cypriot bank, Laiki Bank, will be closed. Deposits under 100,000 euro will remain intact whereas the others will be significantly cut. Laiki Bank’s healthy part will merge with Cyprus Bank, which will also introduce a tax on deposits exceeding 100,000 euro.

According to Drasi’s former leader Stefanos Manos, the head of the Bank of Greece, George Provopoulos, must henceforth present every week a report on the state of the Greek financial system in order for the country not to fall into the situation of Cyprus. The two Mediterranean countries are still anxious and many Greeks still worry that the turmoil in Cyprus will drag down the local banking system. GRReporter has sought the expert opinion of senior lecturer in economics at Cardiff Business School Michalis Argyrou, who states that the dangers for the euro zone do not lie so much in the economy as in the social and political separation between northern and southern Europe.

The lenders and the government have reached an agreement, and the European Central Bank has announced that it will not cease providing liquidity for the Cypriot financial system. Why have the Cypriot banks remained closed?

To answer this question, we need to know the details connected with the agreement between Cyprus and the lenders, which have not been disclosed to the public. Banks may have remained closed due to technical reasons as well. One of them is that the bank employees have not been trained to operate and serve the customers under the new conditions.

I think that the banks have remained closed on Tuesday because the details as regards the rescue programme for Cyprus have not yet been specified. For example, it is not yet clear whether the deposits exceeding 100,000 euro in Laiki Bank will be reduced by 30% or 40%. They have not announced major details about the agreement and so, major uncertainty still exists. When they announce all parameters of the rescue programme, then the banks will be able to reopen to customers.

How do you evaluate the new decision of the government of Cyprus?

The final result for the Cypriot economy after a week of changes is generally negative because Cyprus is closed as an active destination for banking services. It can be said that the second option for the rescue of the Cypriot economy is better because there will be no cuts of deposits under 100,000 euro and no reduction in deposits in particular banks like Hellenic Bank, for example.

Compared to the first version of the rescue programme, the second agreement is more expensive. However, the distribution of the burden in the second option is in favour of the financially weaker citizens. It depends on the perspective of each one separately whether it is better or worse than the original plan for Cyprus.

Personally I think that it is better because there will be no cuts in the deposits of the majority of citizens. In this way, whatever steps are taken from now on, they will be accepted more easily.

The banks will remain closed for almost two weeks. What does this mean to the Cypriot economy?

When banks remain closed for so long, it is very difficult especially for the enterprises to make deals and transactions. The situation is becoming even more difficult as the end of the month, when it is the time to pay the salaries, is approaching. In other words, we are seeing serious disturbances in social and economic life and in doing business as usual.

In times of similar shocks, there is always reduction in market liquidity and delay in payments. None of this is good, but bearing in mind what we expect to happen, the current situation is just the first step in the economic price that Cyprus has to pay during the recovery process of the local banks.

I do not rule out the possibility of people continuing to be restless and starting to withdraw their savings en masse when the banks open. That is why they have put a ceiling on capital movements.

Greek banks, in turn, have serious problems too. Now, they have to bear an additional burden and take over the Cypriot branches. How sustainable is this formula for Greece?

In Greece, the banks fell victim to the state. In Cyprus, it is the opposite - the state fell victim to the banks. Laiki Bank owes the Emergency Liquidity Assistance (ELA) nine billion euro. Cyprus’ GDP is around 15 billion euro. This means that one bank alone owes the rescue mechanism an amount equal to 60% of GDP. In Greece, the recapitalization of the banking system is expected to require about 30 billion euro. This amount is equivalent to approximately 15% of Greece's GDP.

Tags: EconomyMarketsBanksCrisisCyprus
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