The 2012–2013 Cypriot financial crisis is a major economic
crisis in the
Republic of Cyprus that involves the exposure of Cypriot banks to
the
Greek Debt Crisis, the downgrading of the Cypriot economy to junk
status by international
rating agencies, the consequential inability to refund its state
expenses from the international markets[1][2]
and the reluctance of the government to restructure the troubled Cypriot
financial sector.[3]
On 25 March 2013, a €10 billion bailout was announced in return for
Cyprus agreeing to close its second largest bank, the
Cyprus Popular Bank (also known as Laiki Bank), levying all
uninsured deposits there, and possibly around 40% of uninsured deposits
in the Bank of Cyprus (the Island's largest commercial bank), many held
by wealthy citizens of other countries, significantly Russia, who use
Cyprus as a
tax
haven.[4][5]
All
insured deposits of 100,000 Euros or less will not be affected.[6][7]
Precursors
Cyprus's debt percentage compared to Eurozone average since
1999
Following the United States'
subprime mortgage crisis in 2007-2008, which led to a domino effect
of negative consequences in the global economy, the Cypriot economy
contracted by 1.67% in 2009,[8]
largely due to a sharp fall in its tourist and shipping sectors.[9]
Following the contraction, Cyprus experienced continuous increasing
unemployment,[10]
and thus entered into a recession. From 2010 to 2012 the economic growth
of the country has been weak, meaning that the Cypriot economy has yet
to recover to its pre-2009 condition.[8]
Increasing unemployment contributed to an increasing state debt as
expenditure on unemployment benefits kept increasing. Following the
decision of the European Union for a
haircut upwards of 50% on Greek bonds in 2011[11][12],
in which Cypriot banks had invested heavily, the Cypriot financial
system was unable to absorb the cost. The disproportionate size of the
financial sector in relation to the rest of the Cypriot economy meant
that a possible collapse of the Cypriot banks would have catastrophic
results for the economy. The Cypriot state, unable to raise liquidity
from the markets to support its financial sector, requested a bailout
from the European Union.[9]
In September 2011, the credit rating of
Cyprus
was downgraded by all major credit rating agencies following the
Evangelos Florakis Naval Base explosion in July 2011, which occurred
within a period of slow progress for the fiscal and structural reforms.
At the same time yields on its long-term bonds rose above 12%. Despite
its low population and small economy, Cyprus has a large
off-shore banking industry that was shaken to its foundations during
the financial turmoil. With a total
nominal GDP of €19.5bn ($24bn)[13]
the country was unable to stabilize its banks, which had amassed €22
billion of Greek private sector debt and were disproportionately hit by
the
haircut taken by creditors. According to reports in the magazine
Newsweek bank deposits from
Russian
business corporations total $60bn out of a total deposits of $120bn. The
situation is also compounded by the fact that Russian oligarch
Dmitry Rybolovlev owns a 10% shareholding of
Bank of Cyprus.[14][15][16]
A report published in April 2012 by a team of 16 Cypriot economists,
organized by the citizens group Eleutheria ("Freedom"),[17]
attributes the causes of the crisis to sliding competitiveness and also
to increasing public and private debt, which were both exacerbated by
the banking crisis.[18]
Emergency
loan (2012)
Since January 2012, Cyprus has been relying on a €2.5bn (US$3.236
billion) emergency loan from Russia to cover its budget deficit and
re-finance maturing debt. The loan has an interest rate of 4.5% and it
is valid for 4.5 years.[19][20]
It was originally expected that Cyprus would be able to fund itself
again by the first quarter of 2013.[20]
Credit rating downgrade (mid 2012)
On 13 March 2012,
Moody's slashed Cyprus's
credit rating to Junk status, warning that the Cyprus government
would have to inject more fresh capital into its banks to cover losses
incurred through Greece's debt swap. On 25 June 2012, the day when
Fitch downgraded bonds issued by Cyprus to BB+, which disqualified
them from being accepted as collateral by the
European Central Bank, the Cypriot government requested a
bailout
from the
European Financial Stability Facility or the
European Stability Mechanism.[16]
Request for EU intervention and agreement
The Cypriot Government was reported requesting a bailout from the
European Financial Stability Facility or the
European Stability Mechanism on 25 June 2012, citing difficulties in
supporting its banking sector from the exposure to the Greek debt.[21]
Representatives of the Troika (the
European Commission, the
International Monetary Fund, and the European Central Bank) arrived
to the island in July to investigate the country's financial problems,
and submitted the terms of the bailout to the Cypriot government on 25
July.[22]
The Cypriot government expressed disagreement over the terms, and
continued negotiation with Troika representatives concerning possible
alterations to them throughout the following months.[23][24]
On 20 November, the government handed its counter-proposals to the
Troika on the terms of the bailout,[25]
with negotiations continuing. On 30 November it was reported that Troika
and the Cypriot Government had agreed on the bailout terms with only the
amount of money required for the bailout remaining to be agreed upon.[26]
The bailout terms were made public on 30 November.[27]
The
austerity measures included cuts in civil service salaries, social
benefits, allowances and pensions and increases in VAT, tobacco, alcohol
and fuel taxes, taxes on lottery winnings, property, and higher public
health care charges.[28]
Eurozone/IMF deal
On 16 March 2013, the
European Commission (EC),
European Central Bank (ECB) and
International Monetary Fund (IMF) agreed a €10 billion deal with
Cyprus,[29]
making it the fifth country—after Greece, Ireland, Portugal and Spain—to
receive money from the EU-IMF. As part of the deal, a one-off
bank deposit levy of 6.7% for deposits up to €100,000 and 9.9% for
higher deposits, was announced on all domestic bank accounts. Savers
were due to be compensated with shares in their banks.[30]
Measures were put in place to prevent withdrawal or transfer of moneys
representing the prescribed levy.[31]
The deal required the approval of the
Cypriot parliament, which was due to debate it on 18 March.
According to President
Nicos Anastasiades, failure to ratify the measures would lead to a
"disorderly bankruptcy" of the country.[30]
The Russian government "blasted Cyprus's bank levy, piling more pressure
on [capital city] Nicosia" ahead of the parliament's vote on the
bailout. Russia had not decided at the time whether to extend its
existing loan to Cyprus.[32]
With the background of large demonstrations outside the House of
Representatives in Nicosia by Cypriot people protesting the bank deposit
levy,[33]
the deal was rejected by the Cypriot parliament on 19 March 2013 with 36
votes against, 19 abstentions and one not present for the vote.[34]
On 22 March, the Cyprus legislature approved a plan to restructure
the
Cyprus Popular Bank, its second largest bank also known as
Laiki Bank, creating in the process a so-called "bad
bank."[35]
On 25 March, Cyprus President Anastasiades,
Eurozone finance ministers, and IMF officials announced a new plan
to preserve all
insured deposits of 100,000 Euros or less without a levy, but shut
down Laiki Bank, levying all uninsured deposits there, and levying 40%
of uninsured deposits in Bank of Cyprus, held mostly by wealthy Russians
and Russian
Multinational corporations who use Cyprus as an
offshore bank and safe
tax
haven. The revised agreement, expected to raise 4.2 billion Euros in
return for a €10 billion bailout, does not require any further approval
of the Cypriot parliament, as the legal framework for the implied
solutions for Laiki Bank and Bank of Cyprus has already been accounted
for in the bill passed by the parliament last week.[6][7]
When the final agreement was settled on 25 March, the idea of
imposing any sort of deposit levy was dropped, as it was instead now
possible to reach a mutual agreement with the Cypriot authorities
accepting a closure for the most troubled
Laiki Bank (with remaining good assets and deposits below €100,000
being saved and transferred to
Bank of Cyprus, while shareholder capital would be written off, and
uninsured deposits above €100,000, along with other creditor claims,
would also be lost to the degree being decided by how much the
receivership subsequently can rescue out from liquidation of the
remaining bad assets), and as an extra safety measure uninsured deposits
above €100,000 in Bank of Cyprus will also remain frozen until a
recapitalisation has been effected (with a possible imposed haircut if
this is later deemed necessary to reach the aim for a 9%
tier 1 capital ratio). The targeted closure of Laiki and the
recapitalisation plan for Bank of Cyprus helped significantly to reduce
the needed loan amount for the overall bailout package, so that €10bn
was still sufficient without need for imposing a general levy on bank
deposits. Final conditions for activating the programme for the Cypriot
bailout package will be outlined by the Troika's
MoU agreement in early April 2013, and will include:[36]
|
“ |
- Recapitalisation of the entire financial sector while
accepting a closure of the Laiki bank,
- Implementation of the
anti-money laundering framework in Cypriot financial
institutions,
- Fiscal consolidation to help bring down the Cypriot
governmental budget deficit,
- Structural reforms to restore competitiveness and
macroeconomic imbalances,
- Privatization programme.
|
” |
According to IMF, the Cypriot debt-to-GDP ratio is on this background
now forecasted only to reach 100% in 2020, and thus remain within
sustainable territory.[37]
Given the proposed and actual element of taking deposits as part of
the agreement, it was sometimes referred to as a "bail-in" rather than a
bailout.[38]
Irish MEP
Nessa Childers, daughter of the country's former President
Erskine H. Childers, painted a bleak picture. She described the
efforts of the EU-IMF as an "incompetent mess" and said the Eurozone was
more destabilised as a result.[39]
Cypriot
public reactions
Cyprus has seen a number of reactions and responses towards the
austerity measures of the bailout plan. On 8 November 2012,
ERAS (Committee for a Radical Leftist Rally, Επιτροπή για μια
Ριζοσπαστική Αριστερή Συσπείρωση) organised the first protest
against austerity and the Troika negotiations that were still taking
place.[40]
Protesters were gathered outside the
House of Representatives holding banners and shouting slogans
against austerity. Leaflets with alternative proposals for the economy
were distributed in the protest, with proposals including the
nationalization of banking, the reduction of the army and the freezing
of the army budget, and the increase of the corporate tax. Members of
the
New Internationalist Left (NEDA) also participated in the protest.[41]
On 14 November the
New Internationalist Left organised an anti-austerity protest
outside the Ministry of Finance in Nicosia together with the Alliance
Against the Memorandum. In the protest NEDA gave out leaflets, which
expressed the view that "the EU is trying to burden the workers with the
debts from the collapse of the bankers" and that "if this happens, the
Cypriot economy and the future of the new generations will then be
mortgaged to local and foreign profiteers and usurious bankers".[42]
Contract teachers protested outside the House of Representatives on
29 November against austerity measures that would leave 992 of them
without a job next year. The teachers stormed the building and bypassed
the policemen, entering the parliament. The teachers shouted against the
banks and poverty.[43]
A protest by investors was staged on the morning of 11 December outside
the House of Representatives, with protesters again storming parliament
and bypassing the police. The storming of the parliament led to the
interruption of the discussions of the parliamentary committee of
customs. The protesters were asked to leave so that the committee could
continue its work, and the protesters left half an hour later.[44]
A number of protests took place on 12 December. Members of large
families protested outside the House of Representatives against cuts in
the benefits given by the state to support large families. Protesters
threw eggs and stones at the main entrance of the parliament, and a
number of protesters tried to enter the building, but were blocked by
the police force that arrived to handle the protest. It was reported
that a woman fainted during the incidents. The protesters shouted for
the MPs to come out but no response was given.[45]
The protesters were joined by members of KISOA (Cypriot Confederation
of Organisations of the Disabled, Κυπριακή Συνομοσπονδία Οργανώσεων
Αναπήρων), who marched from the Ministry of Finance to the House of
Representatives to protest against cuts in benefits for people with
disabilities.[46]
Later in the day members of public school teachers' trade unions
protested outside the Ministry of Finance against the cuts in education
spending which could result in the firing of teachers.[47]
The unions staged another protest the next day near the House of
Representatives.[48]
See also