Depositors with more than $130,000 in Cypriot banks could see about 40 percent of their deposits turned into bank shares, the country’s finance minister has warned. The news comes after Cyprus struck a deal with the European Union and the International Monetary Fund in which the small Island nation will get $13 billion in aid. To earn that money, though, Cyprus has to overhaul its banking sector and analysts say the result could be crippling.
Banks in Cyprus closed their doors on March 15, and they have not yet re-opened. The trickling cash flow already has taken its toll on the economy.
Small businesses say they are doing very little trade, and some say they already have had to lay off employees.
The worst likely is still to come, though, because the deal struck with international lenders aims to shrink the Cypriot banking sector, which is about eight times the size of the economy.
The country’s biggest lender, the Bank of Cyprus, will be radically restructured and Laiki Bank, the second largest, is set to close. The bank employs 8,000 people – a massive blow for a small country with a population of less than 1 million.
“We had the most similar case of Ireland. We had the decision to push the bill to the taxpayer so the government, the Irish government took the responsibility of recapitalizing the banks, the deposits were guaranteed, and then this spilled over to the real economy,” said Monastiriotis. “The case of Cyprus is exactly the opposite. It is the bond holders, the shareholders, and the depositors that take up the bill, and then we try to minimize the implications to the government.”
On Monday the head of the Eurogroup, Jeroen Dijsselbloem, suggested the rescue program for Cyprus could be a new template for resolving the banking crisis in Europe. He said, “If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute to recapitalizing the bank, and if necessary, the uninsured deposit holders.”