Endless queues at ATMs, protests in front of Parliament, banks closed for 12 consecutive days and businesses under increasing pressure to continue operating: the eastern Mediterranean island of Cyprus, just 200 kilometers from Lebanon, is in crisis management mode.
The aptly named Cypriot central bank governor Panicos Demetriadres has tried to calm the situation, saying that “superhuman efforts” were being made to get the banks to open. And yesterday they did finally reopen — albeit with stringent capital controls such as a daily €300 ($384) cash withdrawal limit on depositors, a €5,000 ($6,400) monthly limit on card transactions and a €3,000 ($3840) cash limit per trip for people leaving the country.
The real cause of the mayhem is the size of the Cypriot banking sector’s investments. These investments accounted for 6.5 times the island’s tiny economy, compared to Lebanon’s 3.5 ratio. With money flowing into their coffers, the deposits were deployed into Greek bonds and as these went down the toilet, the Cypriot banking sector went into crisis mode.
The vast majority, 74 percent, of the deposits in Cyprus’ banks are held in the top two banks: Bank of Cyprus and the Popular Bank of Cyprus (Laiki Bank). The latter will now be wound down as part of a €10 billion ($13 billion) bailout agreement between Cyprus and an international group of lenders.
A key requirement for the agreement was for the island to come up with €5.8 billion ($7.5 billion) before getting the money. European finance ministers initially suggested doing so by taxing depositors across the board — a plan that provoked a furious backlash amongst Cypriots and also Russians who are large depositors with $31 billion in the island’s coffers, according to Moody’s Investors Services.
The final financial rescue plan agreed on Monday sees depositors with accounts under €100,000 ($130,000) – previously expected to contribute 6.75 percent of their savings – spared but leaves those with accounts over that amount expecting cuts to their savings of between 30 to 40 percent; much more punitive than the initial plan of having a tax levy of 9.9 percent.
Nicosia’s pain, Beirut’s gain?
The effect of the plan on Lebanese investments is difficult to judge. Cyprus is home to 52 banks, of which 36 are foreign – including nine Lebanese. The Lebanese exposure, however, is not huge: the combined deposits of the nine banks account for less than 3 percent of the total deposits of Lebanon’s banking sector, Makram Sader, secretary general of the Association of Banks in Lebanon (ABL), wrote in the Lebanese newspaper As-Safir this week. With $128 billion in deposits held by Lebanese banks as of the end of 2012, this implies that around $3.8 billion are in Cyprus. The Lebanese accounts make up fewer than 2.2 percent of the total deposits of the Cypriot banking sector — which stood at $88 billion as of the end of January 2013, Sader wrote. He was not, however, overly concerned about the deposits of the Lebanese banks in Cyprus as he confirms that they have not been invested in Greek or Cypriot bonds.
With regard to investors, as the number of Lebanese with accounts worth over €100,000 ($127,000) in Cyprus is not available, it is difficult to gauge how many will be affected. Nevertheless, the reaction from the Lebanese banking sector has been hostile. “It is unfair to burden the Arab banks with the cost of increasing the capital of the troubled Cypriot banks. The customers of these banks should not pay the price of this decision,” said Joseph Torbey, head of the World Union of Arab Bankers and president of the ABL said.
And many would argue he is right. One is left wondering whether the tough terms for the bailout are Europe’s way of punishing the wealthy visitors interested in the island for reasons that go beyond its golden beaches and sunny weather.
With the island’s hefty levy on wealthy depositors and strict capital controls — the first Eurozone country to impose such controls — the Cypriot banking sector is rapidly losing its appeal. Rich Spaniards and Italians might worry that policymakers will impose the same kind of drastic measures in their own debt-ridden countries, while non-EU investors will be looking for new places to stash their cash. Whether Lebanon’s banking sector could benefit from a flight of capital remains to be seen.
Maya Sioufi is Executive's Banking and Finance editor
