Better but still very painful

Once again the Greek Cypriot Central Bank postponed opening not only the troubled Bank of Cyprus and Cyprus Popular Bank, known as Laiki, but all banks in the tiny island republic until March 28. ATMs were finally loaded with some cash but the central bank introduced tight limits on cash withdrawals.

Developments indicated that though the newly elected President Nikos Anastasiades reached a bailout deal in the early hours of March 25 with the Trio: The Eurogroup, the International Monetary Fund (IMF) and the European Central Bank (ECB), southern Cyprus is still far from finished with the crisis.

By no means was it an easy night for Nikos Anastasiades. For more than ten hours from the evening of March 24 to the early hours of March 25, he bargained to the teeth, threatened to step down and even to withdraw from the euro. However, the Eurogroup, the IMF and the ECB representatives were equally stubborn, threatening to cut off liquidity to Cyprus by March 25th if a deal was not reached. Thus eventually Anastasiades reluctantly abandoned his efforts to shield big account holders and agreed to a new bailout plan. Full details of the new plan are yet to be worked out by the Eurogroup finance ministers but in summary it could be said with the deal Greek Cypriots were kept in the eurozone; the promise to protect bank deposits covered by the EU-mandated 100,000 euro deposit guarantee was restored; and the pain of the recue deal was decided to be squarely placed on a smaller number of large depositors, mostly Russians. So far, though the plan has yet to be derailed by EU finance executives, conflicting reports indicate that under the deal, Laiki will be wound down. Its viable assets and (insured) deposits under 100,000 euros will be transferred into a “good bank” that will merge and help the Bank of Cyprus restructuring. Some 4.2 billion euros worth of “uninsured deposits” will be placed into a “bad bank.” The Bank of Cyprus will be restructured and uninsured deposits with it probably incur haircuts to the order of 35 percent, according to the Economist.

Under the original March 16 plan, Greek Cypriots were to introduce a levy of 9.9 percent on accounts more than 100,000 euros and a lesser 6.75 percent on accounts lower than that benchmark. The protests of the Greek Cypriot people and parliamentarians against what they called “outright robbery” was so intense that Anastasiades had to recall the proposal before it was voted on in Parliament. An improved version, under which deposits up to 20,000 euros would be exempt from the levy while there would be a 6.75 percent levy on deposits in between 20,000 and 100,000 euros and again a high 9.9 percent levy on larger deposits, was voted down in a 36-0 vote, with all 19 members of the Democratic Rally (DYSI) of Anastasiades abstaining.

Now what will be the attitude of the Greek Cypriot House of Representatives on the new bailout plan? What will Russia officially say? Russia’s Premier Dmitry Medvedev condemned the deal, saying “The stealing of what has already been stolen continues.” Will President Vladimir Putin adopt a different attitude and order the rescheduling of a 2.5-billion-euro loan Moscow granted Greek Cypriots in 2011?

Furthermore, with such a blow to its lucrative banking sector, the Greek Cypriot economy will most likely be pushed into recession. Could offshore gas finds help a recovery? But Turkey and Turkish Cypriots say such resources belong to the two peoples of Cyprus and thus use of them must be postponed after a settlement. Plus, the latest rapprochement between Turkey and Israel brought back on the agenda the prospect of pumping Leviathan gas to international markets through Turkey; a possibility that would effectively kill Greek Cypriot LNG terminal plans.

The EU is reluctant to prod Greek Cypriots towards peace using the cash card and Greek Cypriots are still dreaming of converting offshore hydrocarbon riches to much needed recovery currency. A resolution of the Cyprus problem, however, could play the role of a catalyst for a fast recovery and prosperity as it would open to the entire island the huge Turkish market.