Cyprus – Confiscation Of Savings A Reality … But What Changed?

| March 30, 2013 | Articles: General

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The final decision on Cyprus is about to be announced today (Saturday March 30th). Last night, Reuters reported what is to be announced.

Big depositors in Cyprus’s largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday. Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back.

BBC adds to this: “savers with more than 100,000 euros in both banks will face losses possibly up to 80 cents on the euro.”

Yes, indeed, there is a lot of offshore money in the Cypriot banks. But let’s be honest, ordinary locals are hit in an extremely unfair way. Think about people who worked their whole life, entrepreneurial families, or simply people who have been saving very hard their whole life. This testimonial comes from a hard-working “ordinary” Cypriot citizen; it is a must-read and illustrates exactly what we mean.

On the other hand the small savings accounts of the majority of people are not touched, as it appears, which is the “good news” from of social point of view.

Gradual easing of capital controls

Meantime, the Central Bank of Cyprus has announced a gradual easing of the restrictions going forward. The announcement is probably meant to balance the grim news of their decision. As reported by BBC, The easing includes:

  • Debit and credit cards can be used normally for domestic payments.
  • The central bank said it would review the curbs on a daily basis and try to “refine or relax” them when possible.
  • A 5,000-euro (£4,223) monthly limit per person remains in place for card purchases abroad, to stop the flight of capital from the country.

The central bank said in a statement on Friday: “Each day, we will measure and look to refine or relax these controls with the overriding goal of safeguarding and stabilising the Cypriot financial system.”

The IMF is satisfied

Washington Post published of Miss Lagarde, director at the International Monetary Fund (IMF), which she e-mailed last night: “I welcome the agreement. The IMF has always said that we would support a solution that is sustainable, that is fully financed, and that appropriately allocates the burden sharing. I believe that the agreed package meets these three objectives.”

Also on Washing Post, we have found this extremely interesting overview of macro economic indicators of each member state in the European Union, created by the OESO. It shows the unemployment rate in Cyprus is already very high. With the latest measures, the economic situation is about to become much worse. The impact on consumer and business confidence, which we consider the driving force in the economic equation (GDP = C + I + G + X), could be rather devastating.

europe_gdp_unemployment_debt_2011

The impact on the next generation should be included (as described by FT) to get a view on the total picture.

Our question: What did fundamentally change?

Back to the banking system, where it all started. The underlying decision related to the Cypriot banks is that the second largest bank “Laiki” will be split in two parts. The nonperforming loans and toxic assets will be put in a “bad bank” while the healthy assets will be integrated in the Bank of Cyprus.

That could be a mandatory short term solution. When we look at what is happening, however, after reading almost every piece of news and commentary since Saturday March 16th, there is one fundamental question on which we did not find any answer:

Our question is: which structural measures are taken (or at least are being discussed) to solve the core of the problem? What is being undertaken to avoid that this problem returns in 6, 12 or 24 months? Because if it does, it will backfire much harder!

Take a moment to comment in the section below, either if you think there is a valid answer on this question or if you are aware of a credible source that answers this question! You can simply voice your opinion as well.

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