Substantial savers in the Bank of Cyprus, the island's largest, have lost access to 100 per cent of their deposits, giving rise to fears that the economy could contract by as much as 20 per cent.
Customers with more than €100,000 stand to lose 60 per cent of deposits if the bank does not recover: 37.5 per cent will be converted into voting shares in the bank while another 22.5 per cent will be “frozen” until the bank’s assets and liabilities are evaluated and either transformed into shares or written off. Forty per cent has already been “temporarily” frozen to provide the bank with liquidity.
Admitting that savers had sustained a "major hit", finance minister Michalis Sarris said such drastic measures were necessary due to the "excessive expansion" of the island's financial sector.
The troika – the European Commission, the European Central Bank and the International Monetary Fund – has demanded Cyprus raise €5.8 billion without incurring additional debt before it can expect a loan of €10 billion.
Coerced conversions
Following the coerced conversions, Mr Sarris said, "We now have a reformed [bank] that is ready to play its part in the Cyprus economy."
When banks reopen tomorrow, deposits of up to €100,000 of the dismantled Laiki (Popular) Bank, once the second-largest, will belong to the Bank of Cyprus while deposits over this figure will be "set off between loans and deposits". Depositors will not have access to funds for an indefinite period and could lose a large proportion if Laiki does not recoup losses.
The full amount of Laiki deposits belonging to financial institutions, the government, municipalities, insurance companies, schools, universities and charities have, however, been transferred to the Bank of Cyprus.
Mr Sarris expressed the hope that, once the restructuring is complete, Cypriot banks could look for new markets. He argued Cyprus had the expertise and legal and business infrastructure to rebuild.
Marios Tsiakkis, head of the chamber of commerce and industry, said the Bank of Cyprus will no longer be able to serve the business community.
