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Cyprus (11): Big Savers Pay The Bill, But Tourism Is Still Alive..!

Big savers in the Bank of Cyprus are going to lose around 60% of their deposits, as it made known today. This decision is to have a negative impact on foreign deposits in the island. On the other hand, Cypriots have stayed calm after banks reopened last Thursday:

Cyprus details heavy losses for major bank customers – Reuters

Major depositors in Cyprus’s biggest bank will lose around 60 percent of savings over 100,000 euros, its central bank confirmed on Saturday, sharpening the terms of a bailout that has shaken European banks but saved the island frombankruptcy. Initial signs that big depositors in Bank of Cyprus would take a hit of 30 to 40 percent – the first time the euro zone has made bank customers contribute to a bailout – had already unnerved investors in European lenders this week. But the official decree published on Saturday confirmed a Reuters report a day earlier that the bank would give depositors shares worth just 37.5 percent of savings over 100,000 euros. The rest of such holdings might never be paid back. The toughening of the terms sends a clear signal that the bailout means the island’s end, as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses. Banks reopened to relative calm on Thursday after the imposition of the first capital controls the euro has seen since it was launched a decade ago.The streets of Nicosia were filled with crowds relaxing in its cafes and bars on Saturday, but popular anger was not hard to find.

Euro Crisis 1

On the other hand, the IMF said that the agreement with international lenders that reached for Cyprus, is unique in its financial nature and it will not be “applicable” to any other euro zone member-state. The big issue here, is the restoration of bank depositors confidence all over the euro zone countries:

IMF says Cyprus rescue deal unique in nature – Nzweek

The International Monetary Fund(IMF) said Thursday that the agreement reached this week to bail out Cyprus is unique and may not be applicable elsewhere. In a news briefing, IMF spokesman Gerry Rice called the case of Cyprus “very complex, unique in nature” when asked whether the rescue for the island’s banking sector could be a model for other countries facing financial crisis. “It would be difficult to extend the case to the rest of Europe or to the world,” he added. Rice defended the rescue deal reached between Cyprus and Brussels earlier this week, saying it upfront addresses challenges as the oversized banking sector and two deeply insolvent banks had tipped the tiny Mediterranean country into crisis. The plan, which may help Cyprus secure the 10 billion euro bailout from international lenders, would impose heavy losses on uninsured depositors of the two major banks. Rice said the Cyprus case showed “the need for Europe to continue moving towards a banking union, that includes not only the single supervisory mechanism but also a single resolution mechanism.”

On his part,  Athanasios Orphanides former Central Bnaker of Cyprus during the crucial time period 2007-2012 explains what was going wrong:

What happened in Cyprus – The Economist (blog)

Though Cyprus only hit the front pages in the last month, its crisis has been years in the making. Athanasios Orphanides was governor of the Central Bank of Cyprus from 2007 to 2012, giving him a seat on the European Central Bank’s governing council and oversight of Cyprus’ banks. In an interview with The Economist, Mr Orphanides gives his views on how the crisis came about: exposure to Greece and the global financial crisis; decisions by the former communist government (with whom Mr Orphanides had a strained relationship); and flawed decisions by Europe’s governments. Mr Orphanides was raised in Cyprus, received his PhD in economics from the Massachusetts Institute of Technology and was an adviser at the Federal Reserve Board. He is now a lecturer at MIT and a fellow at the Center for Financial Studies at the Goethe University of Frankfurt. The following is an edited transcript of the interview, conducted over the telephone and in writing in the last week. Give us the political and historical background for how Cyprus ended up in the euro area. Cyprus joined the EU in 2004 and immediately wanted to get into the euro area for the express purpose of completing as quickly as possible the union with the core of Europe. It was done because the public thought that would be beneficial for political reasons, not economic reasons. The strategic location of the island has made it a target over the millennia of various powers, and the country is just too small and weak.

How did it come to have such a large financial sector with such large Russian deposits?

Cyprus had developed its financial center over three decades ago by having double taxation treaties with a number of countries, the Soviet Union for example. That means if profits are booked and earned and taxed in Cyprus, they are not taxed again in the other country. Russian deposits are there because Cyprus has a low corporate tax rate, much like Malta and Luxembourg, which annoys some people in Europe…

But tourism remains the big hope for Cyprus:

Cypriots Hope Tourism Remains an Economic Buoy – Wall Street Journal

Cyprus’s financial crisis is barely perceptible from the beach in this resort city on the sunny southern coast, where foreign tourists stroll along the shore relatively unscathed by the nation’s troubles.  But under the surface tranquillity, many Cypriots fret that the nation’s crisis will not only imperil its ability to draw foreign depositors and businesses, but could also deal a blow to another pillar of the economy: foreign tourism. Direct revenue from tourism accounts for about 10% of the island’s gross domestic product, according to government estimates; the industry says the indirect contribution is far larger. Last year, Cyprus welcomed nearly 2.5 million visitors from abroad, roughly twice the island’s population. Any drop in the number of bookings during the busy summer season could compound the nation’s troubles, with some economists already predicting a double-digit hit to Cyprus’s economy this year because of fallout from the banking crisis.

Finally, the re-modeling of the economy in Cyprus remains the biggest challenge for attracting new investements…

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