Cyprus banks to re-open Thursday, but remain controlled

Cyprus President March 2013.jpg

The full extent and duration of capital controls measures to be introduced by Cyprus to prevent cash flight from the island remained unclear yesterday (25 March), as the European Commission launched a task force to help ease the island’s plight.

 

 

 

President Nicos Anastasiades told Cypriots yesterday (25 March) that the EU bailout agreed was “painful but essential."

Banks will remain closed until Thursday and capital controls will be maintained in order to prevent a run on deposits.

Commission officials said that capital controls in Cyprus are only likely to be implemented for a short time.

“Any measures to restrict or limit freedom of movement may only be enacted exceptionally and temporarily and that is what has been requested by the Cypriot authorities,” said Internal Market Commissioner Michel Barnier.

Bank controls tough but justified

Barnier said that such controls will mean very tough restrictions on bank account access and the movement of cash out of Cyprus, to help prevent a bank run. The Commission will monitor the controls on an ongoing basis, officials said, to ensure that they were justified.

Other EU officials acknowledged that controls could last months rather than days, adding that the EU executive could not comment substantively until they saw full details of the control measures, which represent a first within the eurozone.

Such controls have been applied in other European countries such as Iceland, but never within the eurozone, where they will have the effect of ring-fencing capital markets in a part of the currency bloc.

Russia's take on Cyprus

Meanwhile, Russian Prime Minister Dmitry Medvedev said that losses imposed on big depositors – many of them Russian – amounted to "stealing".

"What is going on around Cyprus is that they are continuing to plunder loot there," Medvedev said.

"It is necessary to understand where this story will lead, and what its consequences will be for the international financial system and our interests," he added, in comments that drew no response from the EU executive.

In an interview with the Financial Times yesterday (25 March), Eurogroup head Jeroen Dijsselbloem put pressure on the euro, which fell by more than a cent against the US dollar after he said that the Cyprus rescue should be seen as a template for the rest of the eurozone.

Dijsselbloem argued that Europe could now take a new approach to tackling struggling banks.

“What we've done last night is what I call pushing back the risks. If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?” he told the newspaper.

New initiatives by the Commission sought to protect Cyprus and rectify the underlying problems affecting bank liquidity.

New task force for Cyprus

Commission President José Manuel Barroso announced the creation of a task force to provide technical assistance to the Cypriot authorities, with a strong focus on employment, competitiveness and growth.

The task force will be based in Brussels, with a support team in Nicosia, and will provide quarterly progress reports to the Cypriot authorities and the Commission. Commission Vice president Olli Rehn will  coordinate it.

“We want to alleviate the social consequences of the economic shock by mobilising funds from European Union instruments and by supporting the Cypriot authorities' efforts to restore financial, economic and social stability,” according to Commission President José Manuel Barroso.

“We will bring in further expertise to facilitate the emergence of new sources of economic activity. The Commission stands by the Cypriot people,” Barroso added.

“I want to say this to our fellow Europeans in Cyprus: Cyprus and the Cypriots have gone through very difficult times before – and you know what I mean – and the Cypriots have overcome these difficult times. There will be tough times ahead now as well, but I'm sure that by working hard together, we shall overcome these difficulties.,” said Olli Rehn, the Commission vice president in charge of economic and monetary affairs.

President Nicos Anastasiades, barely a month in office and wrestling with Cyprus' worst crisis since a 1974 invasion by Turkish forces split the island in two, was forced to back down on his efforts to shield big account holders.

Diplomats said the centre-right president had fought hard to preserve the country's business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons but had lost.

The EU and IMF required that Cyprus raise €5.8 billion from its banking sector towards its own financial rescue in return for €10 billion in international loans. The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.

  • 28 March: Cyprus banks to re-open

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