FT: Choke on banks stifles Cyprus economy

09 June 2013

The Bank of Cyprus restructuring has been delayed because of infighting between the government, the central bank and international lenders.

In March, Cyprus agreed to capital controls, a 60 per cent hair cut of uninsured deposits as well as the restructuring of its biggest commercial lender – the Bank of Cyprus – in return for a €10 billion bailout by the EU and the International Monetary Fund.

The central bank says it will relax controls over the summer but has not set a date for lifting them ­altogether. With a key report due at the end of July and Cyprus expected to shut down in August for holidays, the earliest reforms are likely to be introduced is September.

The immediate outlook for the economy is bleak. The Cypriot economy is set to shrink by about 8 per cent this year and another 5 per cent in 2014, according to the IMF. Local economists are more pessimistic, forecasting a double-digit contraction this year as imports are curtailed by a worsening liquidity squeeze.

Other factors feed uncertainty. A plan by Cypriot authorities to boost liquidity by unfreezing 30 per cent of uninsured deposits at BoC was this month blocked by international lenders. The government’s failure to secure approval prompted fears that it may be forced to make yet more concessions, namely increase the haircut from 60 per cent. Already account-holders have seen 37.5 per cent of deposits in BoC above €100,000 converted into equity, with another 22.5 per cent of deposits due for conversion, according to a preliminary restructuring plan. The size of the final haircut will be determined after an independent evaluation of BoC’s assets and liabilities.

Full article (FT subscription required)


© Financial Times