Cyprus’ banking institutions over-extended themselves, leaving the country exposed and now it is time to pull back, finance minister Michalis Sarris said yesterday, referring to a series of painful measures that will see major depositors in the Bank of Cyprus (BoC) lose some 60 per cent of their deposits over €100,000. “Definitely our policy must be that what we did was excessive expansion, which exposed us, and now is time to pull back,” Sarris told reporters yesterday. He was discussing a series of measures that are part of a 11th hour bailout to save the banks and the economy from defaulting, later confirmed by the Central Bank of Cyprus. The haircut will be offset against any existing loans, which Sarris said might mean that some people would be “neither debtors nor creditors”. But he conceded that savers had taken a hit. “We have had a major hit. Doubtless there was a non-voluntary conversion of deposits to shares but we now have a reformed banking institution that is ready to play its part in the Cyprus economy,” Sarris said. The Central Bank of Cyprus published yesterday two government decrees on Laiki Bank and the BoC that came into effect from 6pm on Friday. On Tuesday, when banks re-open, the Laiki branches will belong to BoC but will be open to the public as normal. All Laiki bank debts and other financial obligations with the exception of deposits larger than €100,000 will be transferred to the Bank of Cyprus. A total of 37.5 per cent of deposits larger than €100,000 in the Bank of Cyprus will be converted to shares, and an additional 22.5 per cent will be frozen for up to 90 days but may be converted to shares in order to recapitalise the bank. The owners of those shares will have voting rights in the BoC’s general meetings and will have dividend rights, allowing them a share of any BoC profits made in the future up until the point they regain the amount that got converted into shares plus interest. If any part of the withheld 22.5 per cent is returned to depositors, they will then be given interest on their savings in arrears plus a small surcharge, the Central Bank said. The remaining 40 per cent is also temporarily frozen but will continue to attract interest as normal. The measures are per individual customer, so if two people have a joint account of €200,000, then each person will be thought to have €100,000 and will not incur a haircut. The deposits that are subject to a haircut may be in separate accounts. So if a person has €150,000 in three separate BoC accounts, €50,000 will be subject to a haircut. The BoC’s existing capital, including existing bonds and shares will also be converted in shares but will not carry dividend or voting rights for their owners. Deposits under €100,000 in Laiki will be transferred to the BoC. All deposits belonging to credit institutions, insurance companies, the government and other public bodies such as local authorities and municipal councils will also be carried over to the BoC. The same applies for charity foundations, schools and educational bodies and deposits belonging to the country’s main bank card transaction agency, JCC Payment Systems Ltd. Depositors who move from Laiki to the BoC are not part of the haircut. The deposits that will not be transferred to the BoC will be part of a bad bank that will undergo resolution, i.e. an orderly wind down. Although the money will be there nominally, depositors will not have access to their money for an indefinite amount of time. As the bad bank slowly starts tidying up its account books cash would start going into the accounts, but the depositors could lose a substantial part of their savings if the bad bank fails to fully recoup all of its bad assets, as expected by analysts. Sarris said yesterday that Laiki bank branches abroad would be gradually sold but this might take some time given that “when everyone thinks you should sell you cannot sell on the best terms”. Sarris said that the Laiki Bank UK may be protected in part by measures taken by the Bank of England and is not part of the Cyprus developments on Laiki. “There will have to be an adjustment,” Sarris said adding that the Cyprus-based auditors and lawyers that were part of the country’s financial services have been dealt a heavy blow. With time Cyprus can expand into new markets such as China and the Arabic-speaking countries, he said. Voluntary departures and smart use of pension funds might ease the blow and limit forcible laying offs, he said. Cyprus has the infrastructure, the people and the legal system to become a different kind of financial centre that is more contained without a large physical presence abroad and without huge investments in Greek bonds, he said referring to the years of overexpansion that contributed to the current crisis when banks incurred losses by a Greek debt write down in late 2011. Russian oligarchs are in London and elsewhere, Sarris said referring to unsubstantiated claims by Cyprus’ European partners and foreign media that Russian oligarchs laundered their money in Cyprus. “In Cyprus we have the average Russian that wants a secure system, a good lawyer and a good legal system,” Sarris said. Meanwhile, DIKO’s Nicolas Papadopoulos, who also heads parliament’s finance committee, criticised the Central Bank of Cyprus for failing to brief the public in a timely manner. “For a week now we’ve been waiting on the Central Bank to explain what will happen to their deposits and debt in the BoC and Laiki Bank, as well as their shares,” Papadopoulos said. “People are behaving responsibly but the officials are being irresponsible,” he said.


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