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Cyprus banks reopen

March 28, 2013

ATHENS --  Amid draconian security, Cyprus on Thursday braced for a stampede of customers and a potential drain in deposits as the tiny island moved to open its banks nearly two weeks after shutting them down to avert massive outflows of cash while a controversial bailout was negotiated.

Banks were due to open at noon, operating for six hours under strict controls ordered by the central bank to contain fears of a flight of capital that could reach $30 billion.

A ubiquitous police presence underscored those fears. From daybreak, scores of armed guards were seen fanning across the capital, Nicosia, keeping watch on anxious depositors who calmly stood in long lines outside banks hours before the mid-day opening.

To meet depositors’ demands and to be sure that enough cash was on hand, the European Central Bank sent a special transport aircraft to Cyprus with a cargo of  $6.3 billion, according to local media. Television footage showed a convoy of red, green and white container trucks pulling up inside the compound of the central bank in Nicosia, to prepare for the opening. Helicopters hovered over and elite guards armed with submachine guns kept watch.

Although the Frankfurt-based European Central Bank did not comment on reports that it had sent money to the Mediterranean island, officials said privately that the institution would keep stocking Cyprus with cash.

Fears of a potential run on banks and a renewed economic crisis in Europe stoked investors’ concerns, with Asian shares dropping and the Europe’s euro currency sagging in early Thursday trading.

Strict capital controls decreed by the finance ministry late Wednesday limit cash withdrawals to $383 per person each day. A cap of $6,300 was imposed on transactions with other countries as well as a ban on cashing checks and terminating fixed-term cash deposits before their maturity date.

Cypriot finance officials insist that the controls will be in force for seven days. Economists were skeptical.

"This is a typical set of exchange-control measures, more reminiscent of Latin America or Africa," said Bob Lyddon, general secretary of the international banking association IBOS.

"There is no way these will only last seven days," he said. "These are permanent controls until the economy recovers."

With fewer than 1 million people and an economy about the size of the U.S. state of Vermont, Cyprus has some $88 billion in its banks – a vastly outsized financial system, eight times that of its economic output. The sector took a major hit after bond investments in Greece went sour because  of that country's own financial crisis.

Earlier this week and after weeklong talks, Cyprus agreed on a $20.5-billion bailout with its European peers and the International Monetary Fund, provided savers chipped in with a $7.5 billion bail-in from levies on bank accounts over $130,000.

Under the same deal, the islands’ two biggest and most indebted lenders will face a rigorous restructuring scheme that will shrink the island’s banking sector and cost thousands of jobs, pushing Cyprus deeper into recession.

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