Banks in Cyprus is to remain closed until Thursday in an effort of the Central Bank on the island to control an expected withdraw of foreign deposits after Nicosia accepted the troika’s rescue plan:
The president of Cyprus assured his people a bailout deal he struck with the European Union was in their best interests, but banks will remain closed until Thursday – and even then subject to capital controls to prevent a run on deposits. Returned from fraught negotiations in Brussels, President Nicos Anastasiades said late on Monday the 10-billion euro ($13 billion) rescue plan agreed there in the early hours of the morning was “painful” but essential to avoid economic meltdown. He agreed to close down the second-largest bank, Cyprus Popular, and inflict heavy losses on big depositors, many of them Russian, after Cyprus’s outsize financial sector ran into trouble when its investments in neighboring Greece went sour. European leaders said a chaotic national bankruptcy that might have forced Cyprus from the euro and upset Europe’s economy was averted – though investors in other European banks are alarmed by the precedent of losses for depositors in Cyprus.
The main requirement of international creditors is the shrinking of the island’s banking sector which is to have a serious negative impact on the Cyprus financial services model:
Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10-billion euros (US$13-billion) of aid. Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets. “It’s been yet another hard day’s night,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels early today. “There were no optimal solutions available, only hard choices.” It was the second time in nine days that Cyprus struck a deal with its euro partners and the International Monetary Fund, capping a tumultuous week that underscored the contradictions of the crisis management that has dominated European policy making for more than three years. Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009.
The Cypriot low corporate tax rate was one of the main competitive advantages that the island offered to its foreign investors:
A planned bailout of Cyprus could turn Russia’s favorite offshore financial haven into hostile territory. Cyprus and its European creditors agreed early Monday to slap a tax of up to 40 percent on bank deposits over €100,000 ($130,000) and impose strict controls on capital leaving the island nation. That sounds pretty bad for wealthy Russians who have tens of billions of dollars in Cypriot bank accounts— and for Russian companies that funnel tens of billions more through Cypriot subsidiaries to take advantage of the island’s low corporate tax rate. Russia’s richest business people, though, may escape the pain. Take billionaire Gennady Timchenko, co-founder of Gunvor, one of the world’s biggest commodities trading outfits. Gunvor is legally headquartered in Cyprus and has $87 billion in annual turnover. But Timchenko told the Swiss newspaper Neue Zurcher Zeitung this week that the company had “only a few hundred thousand euros” in Cypriot banks. Under a treaty between Russia and Cyprus, a Russian company can book profits in Cyprus, where the corporate tax rate is 10 percent, half the rate in Russia. And, says Sergei Aleksashenko, a former deputy governor of Russia’s central bank, “It is not even necessary for the Cyprus company to have a bank account in Cyprus. It could be in another country, anywhere.”
Finally, the island enters in a new financial era starting from today and as its banks are to remain closed. Cypriots have to fight against a financially hostile environment. Cyprus has once again to prove itself by its effort and people!