3 min read

Cyprus: A mess taking shape

So it turns out Thursday is the new Tuesday. Though until yesterday, Tuesday was the previous Tuesday. The bank holidays here in Cyprus have now stacked up so bewilderingly high that this is now the longest period of enforced bank closure in modern history (at least as far as the IMF’s records go).

In theory, the Cypriot banks will finally re-open on Thursday, although I’ve heard from Government sources that this too may be optimistic. The problem is that it takes longer than a few days to untangle a financial mess such as the one left by the collapse of a banking system. In the case of BCCI it took more than two decades; and even five years after the implosion of Lehman Brothers creditors are still appealing their settlement.

New banking regulations should in theory make this process a bit quicker, but those regulations are still only half-formed, all of which means that it will take many years for us to understand just what the financial cost of the Cyprus bail-out is to be.

Now, in theory, most of the money for the Cypriot-funded element of the bail-out will come from depositors in those two banks, but the way it is being arranged involves a significant level of financial complexity. Laiki, the most toxic bank (and the second-biggest in the country), will be completely wound up. It is, in short, going bankrupt. Depositors with anything below €100,000 will get this money back. If you have anything above €100,000 you are quite likely to lose almost all of that – and if you do get some crumbs back, they will come only after half a decade and a lot of lawyer time.

It’s tempting, at this point, to dwell on the impact this will have the economy. Not just for Russian tax avoiders but for the Cypriot manufacturer trying to build up some cash to fund a new factory or some new employees. The truth is that in Europe, as in the UK, businesses (rather than individuals) are the ones hoarding cash at the moment. In one fell swoop many companies’ expansion plans have been obliterated. Then there’s the fact that Cyprus is (given its status as a funnel for Russian money) the main provider of foreign direct investment to Russia. But try to leave those enormous concerns aside and consider Bank of Cyprus.

This is the biggest bank in the country. It is in the second-biggest trouble. Its depositors may get about 60% of their savings above €100,000 back, and the working plan is to clarify how much by Friday, but given the mess in Laiki, parts of which are supposed to be folded into BoC, this may prove optimistic.

Anyway, carrying out a good bank-bad-bank split is a painful exercise and takes a lot longer than a couple of days. The senior administrator to Bank of Cyprus was appointed only on Monday night. When I spoke to people involved in the Laiki restructuring that same day they confessed that they hadn’t even had a proper look at the books.

Then there’s the question of what’s happening to the Greek assets of the Cypriot banks. Under the bailout plan the good assets will be sold off to Greek bank Piraeus, which has itself been mired in several scandals in recent years. The bad assets are left in Cyprus, something a senior Parliamentary figure described to me as “bank robbery”.

Now, the above stream-of-consciousness description is intended to underline one point: this is going to be messy. Very messy. The recrimination in Cyprus is already starting, but it will get even louder and even more aggressive when it becomes clearer even vaguely how much people have lost. Walking around Nicosia today you don’t get the impression of a nation in crisis – on the contrary, everyone is friendly, there is no panic around ATMs or banks. If anything there’s a sense of weary resignation. However, that is because no-one yet knows how much they have lost. They have not yet seen the bank statements telling them. They have not yet been laid off.

However, the next part of this bail-out process is only now creaking into operation, and it will be painful, in a long, drawn-out kind of way.

The tragedy of Cyprus is that the country needn’t have gone through this. Yes, it was due an overhaul of its economy. Yes, it had become accustomed to a standard of living that it couldn’t sustain indefinitely. Yes, its policymakers had mismanaged the economy for many years. But the chaotic, unpredictable and frequently economically-illiterate (not to mention socially-blind) way that the bail-out process here has been wrung out is a travesty. And the suffering caused by it has only just begun.

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