2012–13 Cypriot financial crisis
The 2012–2013 Cypriot financial crisis is an economic crisis in the Republic of Cyprus that involves the exposure of Cypriot banks to overleveraged local property companies, the Greek government-debt crisis, the downgrading of the Cypriot government's bond credit rating to junk status by international credit rating agencies, the consequential inability to refund its state expenses from the international markets and the reluctance of the government to restructure the troubled Cypriot financial sector.
On 25 March 2013, an €10 billion international bailout by the Eurogroup, European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) was announced, in return for Cyprus agreeing to close the country's second-largest bank, the Cyprus Popular Bank (also known as Laiki Bank), imposing a one-time bank deposit levy on 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 (many of them from Russia) who were using Cyprus as a tax haven. No insured deposit of 100,000 Euros or less would be affected.
The United States' subprime mortgage crisis in 2007-2008 led to a domino effect of negative consequences in the global economy including the European Union. The Cypriot economy went into recession in 2009, as the economy shrank by 1.67%, with large falls specifically in the tourism and shipping sectors which caused rising unemployment. Economic growth between 2010 and 2012 was weak and failed to reach its pre-2009 levels. Commercial property values declined by approximately 30%. Non-performing loans rose to a reported 6.1% in 2011, increasing pressure on the banking system. With a small population and modest economy, Cyprus had a large offshore banking industry. Compared to a nominal GDP of €19.5bn ($24bn) the banks had amassed €22 billion of Greek private-sector debt with bank deposits $120bn, including $60bn from Russia business corporations. Russian oligarch Dmitry Rybolovlev owned a 10% shareholding of Bank of Cyprus.
Cyprus banks first came under severe financial pressure as bad debt ratios rose. Former Laiki CEO Efthimios Bouloutas admitted that his bank was probably insolvent as early as 2008, even before Cyprus entered the Eurozone. The banks were then exposed to a haircut of upwards of 50% in 2011 during the Greek government-debt crisis, leading to fears of a collapse of the Cypriot banks. The Cypriot state, unable to raise liquidity from the markets to support its financial sector, requested a bailout from the European Union.
Progress on fiscal and structural reforms was slow and following a serious, accidental explosion in July 2011 at the Evangelos Florakis Naval Base the major credit rating agencies downgraded the country's rating in September. Yields on its long-term bonds rose above 12% and there was concern that the country would be unable to stabilize its banks.
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%, with no amortization/repayment until its maturity ends after 4.5 years, and no penalty if repayment at that point of time will be delayed, in the event of a persisting lack of access for Cyprus to cover its financial needs through the normal funding markets. The received loan was expected to cover all refinancing of maturing government debt and the amount needed for the governments continued budget deficits, until the first quarter of 2013. But the received loan did not include any funds for recapitalization of the Cypriot financial sector. Looking further ahead, it was generally expected Cyprus would need to apply for an additional bailout loan.
Credit rating downgrade to 'junk'
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.
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. Representatives of the Troika (the European Commission, the International Monetary Fund, and the European Central Bank) arrived on 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. The Cypriot government expressed disagreement over the terms, and continued negotiation with Troika representatives concerning possible alterations to them throughout the following months.
On 20 November, the government handed its counter-proposals to the Troika on the terms of the bailout, 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. By contrast, the IMF referred only to "good progress towards an agreement". The preliminary agreement terms were made public on 30 November. 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.
On 16 March 2013, the Eurogroup, European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) agreed on a €10 billion deal with Cyprus, 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. Measures were put in place to prevent withdrawal or transfer of moneys representing the prescribed levy.
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. The Russian government "blasted Cyprus's bank levy, piling more pressure on the country's capital, 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. With the background of large demonstrations outside the House of Representatives in Nicosia by Cypriot people protesting the bank deposit levy, 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.
On 22 March, the Cyprus legislature approved a plan to restructure the Cyprus Popular Bank (also known as Laiki Bank), its second largest bank, creating in the process a so-called "bad bank." 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.
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 direct closure of the most troubled Laiki Bank. Remaining good assets and deposits below €100,000 with Laiki Bank would be saved and transferred to Bank of Cyprus (BoC), while shareholder capital would be written off, and the uninsured deposits above €100,000 - along with other creditor claims - would be lost to the degree being decided by how much the receivership subsequently can recover from liquidation of the remaining bad assets). As an extra safety measure, uninsured deposits above €100,000 in BoC will also remain frozen until a recapitalisation has been implemented (with a possible imposed haircut if this is later deemed needed to reach the requirement for a 9% tier 1 capital ratio). The targeted closure of Laiki and recapitalisation plan for BoC 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. The final conditions for activation of the bailout package were outlined by the Troika's MoU agreement, which was endorsed in full by the Cypriot House of Representatives on 30 April 2013, and included:
The Cypriot debt-to-GDP ratio is on this background now forecasted only to peak at 126% in 2015 and subsequently decline to 105% in 2020, and thus considered to remain within sustainable territory. The €10bn bailout comprise €4.1bn spend on debt liabilities (refinancing and amortization), 3.4bn to cover fiscal deficits, and €2.5bn for the bank recapitalization. These amounts will be paid to Cyprus through regular tranches from 13 May 2013 until 31 March 2016. According to the programme this will be sufficient, as Cyprus during the programme period in addition will:
- Receive €1.0bn extraordinary revenue from privatization of government assets.
- Ensure an automatic roll-over of €1.0bn maturing Treasury Bills and €1.0bn of maturing bonds held by domestic creditors.
- Bring down the funding need for bank recapitalization with €8.7bn, of which 0.4bn is a reinjection of future profits earned by the Cyprus Central Bank (injected in advance at the short term by selling its gold reserve), and €8.3bn origin from the bail-in of creditors in Laiki Bank and Bank of Cyprus.
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.
- 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.
- In its Schumpeter Blog The Economist called The Cyprus bail-out:Unfair, short-sighted and self-defeating.
Specifically the article says
"The Cypriot deal has no coherence in the larger context. The euro crisis has been in abeyance for a few months, thanks largely to the readiness of the European Central Bank to intervene to help struggling countries. The ECB’s price for helping countries is to insist they go into a bail-out programme. The political price of going into a programme has just gone up, so the ECB’s safety net looks a little thinner.
The bail-out appears to move Europe further away from the institutional reforms that are needed to resolve the crisis once and for all. Rather than using the European Stability Mechanism to recapitalise banks, and thereby weaken the link between banks and their governments, the euro zone continues to equate bank bail-outs with sovereign bail-outs. As for debt mutualisation, after imposing losses on local depositors, the price of support from the rest of Europe is arguably costlier now than it ever has been."
- Dr. Jeffrey Stacey wrote in Germany's Der Spiegel, under the headline "'Abject Error': How the Cyprus Deal Hurts EU Strategic Interests":
In strategic terms the EU hurt not only Cyprus and itself, but also the interests of the US and other allies in the West. Europe pushed Cyprus directly into the arms of the Russian government. Not only did this hurt the prospects for its own deal, but it gave leverage to Moscow in the process.
More important still, however, by forcing Anastasiades between the rock of a forced bank levy and the hard place of seeking assistance from Moscow, the EU seriously undermined him domestically precisely when the West was about to reap the benefits at long last of a fairly pro-Western Cypriot president, crucially necessary to overcome sour relations with Turkey that continue to undermine NATO relations, EU relations, NATO-EU relations, and US relations with both. To top it all off, a peace deal along the lines of the Annan Plan for a final resolution of the 40 year-old Cypriot divide -- the prospects for which had improved with the election of Anastasiades -- has seen its prospects diminished.
- Economist Richard D. Wolff commented in an interview in relation to the Cyprus bailout agreement as follows:
This is blackmail. This is basically the officials of the banks and the political leaders going to the mass of people and saying to them, “This awful deal that makes you, who have nothing to do with the crisis and didn’t get any bailout, pay the costs of the crisis and the bailout. You must do this, because if you don’t, we will do even more damage to you and your economy. So give us your deposits, give us your money, pay more taxes, suffer fewer social programs, because if you don’t, we will impose even worse on you.” It’s the basic idea of austerity across the board and in our country, too. And I think it’s the confrontation of a system that does not work with the mass of the people, saying, “We will go down and take you with us, unless you bail us out.”
Cyprus has seen a number of reactions and responses towards the austerity measures of the bailout plan. On 8 November 2012, the Cypriot far-left party Committee for a Radical Left Rally (ERAS) made the first protests against austerity while the Troika negotiations that were still taking place. 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.
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".
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. 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.
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.
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. 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. The unions staged another protest the next day near the House of Representatives.
Haravgi, a far left-wing newspaper reported that just before bank deposits were blocked a number of companies belonging to family of president Nikos Anastasiadis have transferred over $21m outside of Cyprus. Anastasiadis has denied these allegations. Also a number of loans issued to members of political parties or public administration officers were fully or partially written off.
Non-EU bank depositors
Non-resident investors who held deposits prior to March 15, 2013 when the plan to impose losses on savers was first formulated, and who lost at least three million euros would be eligible to apply for Cypriot citizenship. Cyprus's existing "citizenship by investment" program would be revised to reduce the amount of investment required to be eligible for the program to three million euros from the previous ten million euros. "These decisions will be deployed in a fast-track manner," Anastasiades said in an address to Russian business people in the port city of Limassol in 2013. Other measures were also under consideration, he said, including offering tax incentives for existing or new companies doing business in Cyprus.
A team of 16 Cypriot economists, organized by the citizens group Eleutheria ("Freedom"), attributed the crisis to sliding competitiveness, increasing public and private debt, exacerbated by the banking crisis.
- "Cyprus asks EU for financial bailout – Europe". Al Jazeera English. Archived from the original on 2013-01-16.
- "Cypriot banks in the aftermath of the Greek haircut". The Cyprus Lawyer. 26 October 2011. Archived from the original on 2013-02-03.
- "Cyprus Refuses to Learn From Its Mistakes". The New York Times no. Archived from the original on 2013-04-11. Retrieved 2 April 2013.
- "Cypriot banks to reopen amid criticism of bailout". The Washington Post. March 27, 2013. Archived from the original on 2013-04-12.
- "Cyprus disaster shines light on global tax haven industry no". MSNBC. March 26, 2013. Archived from the original on 2013-04-11. Retrieved 2 April 2013.
- Jan Strupczewski; Annika Breidthardt (25 March 2013). "Last-minute Cyprus deal to close bank, force losses". Reuters. Archived from the original on 2013-04-11. Retrieved 25 March 2013.
- "Eurogroup signs off on bailout agreement reached by Cyprus and troika". Ekathimerini (Greece). 25 March 2013. Archived from the original on 2013-04-10. Retrieved 25 March 2013.
- "Cyprus economic growth, Cyprus GDP growth rate TheGlobalEconomy.com". Archived from the original on 2013-04-11.
- "Up Front - March 19, 2013 at 7:00am KPFA 94.1 FM Berkeley: Listener Sponsored Free Speech Radio". Archived from the original on 2013-04-15.
- "Cyprus Unemployment rate - Economy". Archived from the original on 2013-04-11.
- "RICS Cyprus Property Index Q4 2012". RICS Europe. Retrieved 14 April 2013.
- "Bank nonperforming loans to total gross loans (%)". World Bank. Archived from the original on 2013-04-29. Retrieved 14 April 2013.
- "Cyprus". International Monetary Fund. Archived from the original on 2012-12-09. Retrieved 18 April 2012.
- Stephen Castle; David Jolly (12 June 2012). "Rates on Spanish Bond Soar". The New York Times. Archived from the original on 2013-01-11. Retrieved 12 June 2012.
- "Eurozone crisis live: Spain told to cut harder as Greek deal approved". The Guardian. 13 March 2012. Archived from the original on 2013-04-20. Retrieved 13 March 2012.
- James Wilson (25 June 2012). "Cyprus requests eurozone bailout". Financial Times. Archived from the original on 2013-01-24. Retrieved 25 June 2012.
- "Greek bond investors take big 'haircut' in bailout deal Marketplace.org". Archived from the original on 2013-04-15.
- "Greek debt 'haircut' takes off New Europe". Archived from the original on 2013-04-12.
- "Russia loans Cyprus 2.5 billion". The Guardian. 10 October 2011. Archived from the original on 21 July 2012. Retrieved 13 March 2012.
- Hadjipapas, Andreas; Hope, Kerin (14 September 2011). "Cyprus nears €2.5bn Russian loan deal". Financial Times. Archived from the original on 2013-01-23. Retrieved 13 March 2012.
- "Cyprus asks EU for financial bailout – Europe". Al Jazeera. Archived from the original on 2013-01-16.
- "Shiarly: troika will be here very soon". Cyprus Mail. 2 November 2012. Archived from the original on 2013-01-21.
- [dead link]
- "Troika leaves no stone unturned". Cyprus Mail. September 14, 2012.
- "Troika handed compromise proposals". Cyprus Mail. 21 November 2012. Archived from the original on 2013-01-21.
- Tugwell, Paul (30 November 2012). "Cyprus, Troika Agree Bailout Terms, ECB Demetriades Says". Bloomberg. Archived from the original on 2013-01-18.
- IMF (23 November 2012). "Statement by the EC, ECB, and IMF on the Mission to Cyprus". Archived from the original on 2013-04-29.
- "Bailout deal made public". Cyprus Mail. 1 December 2012. Archived from the original on 2013-01-20.
- "Microsoft Word - Cyprus MoU 29 Nov to EWG.doc" (PDF).
- "Eurozone agrees to €10bn bailout package for Cyprus while Cypriots voice anger over deposits levy". Raidió Teilifís Éireann. 16 March 2013. Archived from the original on 2013-04-12. Retrieved 16 March 2013.
- "Cyprus bailout: Parliament postpones debate". BBC News. 17 March 2013. Archived from the original on 2013-04-19.
- "Cyprus eurozone bailout prompts anger as savers hand over possible 10% levy: Angry Cypriots try in vain to withdraw savings as eurozone bailout terms break taboo of hitting bank depositors". The Guardian. Reuters. 16 March 2013. Archived from the original on 2013-04-20. Retrieved 16 March 2013.
- Graeme Wearden (2013-03-15). "Cyprus races to rework savings tax after closing banks till Thursday - as it happened". Guardian. Archived from the original on 2013-04-20. Retrieved 2 April 2013.
- "Cookies must be enabled. The Australian". Archived from the original on 2013-04-10.
- "Cyprus lawmakers reject bank tax; bailout in disarray Reuters". Archived from the original on 2013-04-11.
- Alderman, Liz (March 22, 2013). "Cyprus Passes Parts of Bailout Bill, but Delays Vote on Tax". New York Times. Archived from the original on 2013-04-29.
- "Eurogroup Statement on Cyprus" (PDF). Eurogroup. 25 March 2013. Retrieved 25 March 2013.
- "The Economic Adjustment Programme for Cyprus" (PDF). Occasional Papers 149 (yield spreads displayed by graph 19). European Commission. 17 May 2013. Retrieved 19 May 2013.
- Bjork, Christopher, "ECB’s Mersch: Cyprus ‘bail in’ not a template". Archived from the original on 2013-04-11., MarketWatch, March 27, 2013. Headline reference is to ECB governing council member Yves Mersch. Retrieved 2013-03-27.
- "MEP Childers: Cyprus bailout an 'incompetent mess'". Irish Examiner (Thomas Crosbie Holdings). 27 March 2013. Archived from the original on 2013-04-11. Retrieved 27 March 2013.
- Wearden, Graeme (16 March 2013). "The Cyprus bail-out: Unfair, short-sighted and self-defeating". The Economist (UK). Archived from the original on 2013-04-29. Retrieved 20 March 2013.
- Wearden, Graeme (3 April 2013). "'Abject Error': How the Cyprus Deal Hurts EU Strategic Interests". Der Spiegel (Germany). Archived from the original on 2013-04-29. Retrieved 4 April 2013.
- "Events in Cyprus expose EU plan to steal peoples’ savings and bailout private banks". Citizen Action Monitor. MARCH 31, 2013. Retrieved 17 Feb 2014.
- BDigital Web Solutions. "Την Πέμπτη η πρώτη εκδήλωση διαμαρτυρίας κατά του Μνημονίου | Κύπρος | Η ΚΑΘΗΜΕΡΙΝΗ". Kathimerini.com.cy. Archived from the original on 2013-02-10.
- "Συγκέντρωση διαμαρτυρίας από την ΕΡΑΣ κατά του μνημονίου και της Τρόικας μπροστά από τη Βουλή". Onlycy.com. Archived from the original on 2013-01-30.
- "Εκδήλωση διαμαρτυρίας κατά της Τρόικας έξω από το ΥΠΟΙΚ". Archived from the original on 2013-01-31.
- BDigital Web Solutions (29 November 2012). "Σοβαρά επεισόδια σε Βουλή-ΥΠΟΙΚ με τους εποχιακούς ωρομίσθιους | Κύπρος | Η ΚΑΘΗΜΕΡΙΝΗ". Kathimerini.com.cy. Archived from the original on 2013-02-10.
- "Επεισόδια έξω από τη Βουλή (φωτο+βίντεο)". Sigmalive.com. Archived from the original on 2013-02-02.
- "Συμπλοκές στη Βουλή στη διαμαρτυρία των πολυτέκνων(βίντεο) | News". Sigmalive.com. Archived from the original on 2013-02-02.
- "Στους δρόμους και οι ανάπηροι". Sigmalive.com. Archived from the original on 2013-02-02.
- "Αντιδρούν και οι εκπαιδευτικές οργανώσεις | News". Sigmalive.com. Archived from the original on 2013-02-02.
- "Υπό δρακόντεια μέτρα η διαδήλωση των εκπαιδευτικών". Sigmalive.com. Archived from the original on 2013-02-08.
- "Cyprus President’s Family Transferred Tens Of Millions To London Days Before Deposit Haircuts". HPUB. 2013. Archived from the original on 2013-04-29. Retrieved 1 April 2013.
- "Anastasiades requests investigation into allegations against family members". EnetEnglish. 2013. Archived from the original on 2013-04-12. Retrieved 1 April 2013.
- "Cypriot banks in politician loan scandal". EnetEnglish. 2013. Archived from the original on 2013-04-12. Retrieved 1 April 2013.
- "Cyprus to ease citizenship requirements, attacks EU "hypocrisy"". Reuters.com. Retrieved 2013-08-17.
- "Cyprus to ease citizenship rules for EU bailout losers". Bbc.co.uk. 2013-04-14. Retrieved 2013-08-17.
- Greek ΕΛΕΥΘΕΡΙΑ
- Η τριλογία της αποτυχίας μας, in the Cyprus daily newspaper Φιλελεύθερος dated 9 September 2012, economics section, page 1.