Banks still shut in Cyprus as island fights to stave off collapse

3.21.13
by Harry Wilson
UK Telegraph

The Cypriot financial system stands on the edge of collapse as local banks on Wednesday remained closed and the European authorities warned they could begin withdrawing support for the country within days.

Protesters shout slogans during a rally against a tax levy on deposits, in front of the Cyprus parliament in Nicosia Photo: EPA

Cyprus’s central bank said lenders would remain closed until at least Tuesday amid growing speculation the Meditterranean island could become the eurozone member to exit the currency bloc.

Officials at the ECB were reported on Wednesday to be considering pulling the plug on Cypriot banks unless the country agreed to a new bailout package.

Jörge Asmussen, the ECB’s chief negotiator, warned that Cyprus’s decision to reject the terms of an €10bn (£8.6bn) bailout meant it could not guarantee support to domestic lenders for much longer.

“We can provide emergency liquidity only to solvent banks and... the solvency of Cypriot banks cannot be assumed if an aid programme is not agreed on soon, which would allow for a quick recapitalisation of the banking sector,” said Mr Asmussen in an interview with a German newspaper.

The threat followed the unanimous voting down by the Cypriot parliament of a rescue package that would have seen the authorities levy a “tax” of up to 10pc on deposits of more than €100,000.


Senior European politicians have expressed hope that a new bailout could be organised, however some have begun to openly discuss the possibility of Cyprus exiting the euro. Austrian Chancellor, Werner Faymann, said he could not “rule anything out for Cyprus”.

German Chancellor Angela Merkel said she expected the Cypriot government to come up with a new rescue plan, but continued to insist it was fair for large depositors in Cypriot banks to face a loss on their savings.

Banks in Cyprus have remained closed since last week and on Wednesday the country’s central bank said lenders would not open their doors until next Tuesday, leaving Cypriots dependent on using ATMs for day-to-day cash.

The prolonged closure of banks has led to widespread fears among senior industry executives that it could undermine confidence in the financial system.

Christian Clausen, president of the European Banking Federation, said a way had to be found to reopen Cypriot banks before it was “too late”.

“Everything needs to be solved very quickly. This is a matter of a very few days before it gets too late,” Mr Clausen told Reuters.

Hung Tran, deputy managing director of the Institute of International Finance, the banking industry’s main lobbying group, warned that the “symbolism” of the banks’ closure was “significant”.

“The risk is that there will be a deposit flight out of Cyprus,” he said.

The prospect of capital controls to prevent deposits flooding out of Cyprus has raised fears about the implications of such drastic measures not just for the eurozone, but the wider European Union. “The real issue is how much this will impact confidence throughout Europe,” said Mr Clausen.