Finance ministers agreed early Monday on a bailout for the Mediterranean island of Cyprus. While the agreement averted the near-term disaster, much of the coverage focused on the fact that the aftermath is going to do long-term damage to the island’s finances and population.
Here’s the top of the Wall Street Journal story:
Cyprus secured a bailout from its international creditors early Monday, ending a week of financial panic that threatened to see the small island nation become the first government to leave the euro zone.
But lasting damage has likely been inflicted on the Cypriot economy. Officials said they believe the country will now need strict controls on money transfers in and out of the economy in the coming weeks or possibly months, cutting off its citizens and companies from much of the rest of the euro zone’s financial system. And the bailout program aims to slash the size of Cypriot banks, perhaps forever ending the country’s status as an offshore tax haven and financial-services center.
Cyprus could see its economy contract by 10% or more in the years ahead, economists said.
“The near future will be very difficult for the country and its people,” Europe’s economics commissioner, Olli Rehn, said after the negotiations ended.
The deal lines up €10 billion ($13 billion) in financing for the government and shuts Cyprus’s second-largest bank, Cyprus Popular Bank PCL, imposing steep losses on deposits with more than €100,000, European officials said. The country’s largest bank, Bank of Cyprus PCL, will also be downsized aggressively, with large depositors there taking a hit.
The deal, which closes the second-largest bank to help prop up the largest, should help return Cyprus to a more normal state of being, the New York Times reported:
These provisions should help reverse what, in recent days, has been Cyprus’s steady retreat into a surreal pre-modern economy dominated by cash.
Retailers, gas stations and supermarkets, gripped by uncertainty over whether Cyprus would really secure a 10 billion-euro financial lifeline, have increasingly refused to take credit cards and checks.
“It’s been cash-only here for three days,” said Ali Wissom, the manager at Il Forno di Jenny’s restaurant off Cyprus’s main square in Nicosia. “The banks have closed, we don’t really know if they will reopen, and all of our suppliers are demanding cash — even the beer company.”
With major banks in Cyprus shut for more than week, a trip to the cash machine became a daily ritual for anyone in need of money. The initial limit on withdrawals was 400 euros. It then fell to 260. As of Sunday night, it slipped to a meager 100 euros.
At the Centrum Hotel, Georgia Xenophontes, 23, an employee in the front office, said she drained her bank account at a cash machine last week — just in time to avoid being hit with the latest withdrawal limit.
“This is affecting everything in our lives,” she said. “Even though you don’t want to count on money, you need it. But we don’t have stability.”
Bloomberg Businessweek went after the human-interest angle using anecdotes from those struggling to make a living in the already economically unstable country:
The deal struck in Brussels in the early hours of Monday morning may have saved Cyprus from tumbling out of the euro, but for the residents of the tiny island nation in the eastern Mediterranean, there was little to celebrate. “We feel like we’re just one step away from total death,” says Demetra Kattou, 47, who teaches French at a school in the city of Limassol. “We feel like we’ve been treated unfairly and without mercy. Things are happening too fast.”
The agreement avoids a controversial tax on bank deposits, a measure the country’s parliament rejected last week. But it’s likely to devastate the country’s financial-services sector—the source, according to the Cyprus Employers & Industrialists Federation, of 80 percent of the country’s GDP and 72 percent of its employment. In exchange for a 10 billion-euro bailout from the European Union and the International Monetary Fund, President Nicos Anastasiades agreed to shutter the nation’s second-largest bank, Cyprus Popular Bank, largely wiping out deposits above the insured limit of 100,000 euros. Depositors in the country’s biggest bank, Bank of Cyprus (BOC), could lose as much as 40 percent of their uninsured savings. “We don’t have any numbers or real data on how this will affect our lives,” says Kattou’s husband, Pambos Kattos, 52, a civil engineer who will likely lose his job at the bank that’s being folded. “But there will be great destruction.”
A series of capital controls introduced by lawmakers on Saturday is expected to prevent a run on the country’s banks Tuesday. As of Sunday evening, the country’s ATMs were already limiting withdrawals to 120 euros a day. But while the funds from abroad will plug the country’s financial gap, the island’s banking industry is all but certain to see a dramatic deflation, starting with employees of the failed bank. Some estimates put the projected loss in GDP as high as 20 percent. “It feels like a war situation,” says Anna Papaioannou, 51, an employee in Cyprus Popular Bank’s IT department. “It’s like you have cancer and instead of treating the patient, you kill him. And then you say the problem is solved.”
The reach of this story and the affect on the citizens can’t really be overstated. It’s good to see the business media speaking with citizens and illuminating some of the problems with the decision. It puts a human fact to a financial problem, a connection we can all strive to make more often.
