Press reports indicate that this is going to be a long night in Brussels, and that the damage to the Cypriot economy will be intense.
Cyprus Popular Bank Closure
It look as though the decision has been adapted to wind down CPB / Laiki. This will result in at least 2,000 layoffs, and an uninsured depositor loss of at least 40%.
IMF presses to close the Bank of Cyprus (BOC)
The Financial Times reports that the IMF is pressing to close the Bank of Cyprus, the largest Cypriot bank, and one which has not suffered as much damage as CPB. This would be a catastrophic decision, and one which leads to major question as to the IMF’s role.
Capital Controls are a Certainty
All press reports mention a 20-25% haircut on uninsured deposits at BOC, i.e. accounts over EUR 100,000. This means that no matter what happens, capital control will be enforced, as there is no way international companies are going to sit back and accept the risk of further “levies”.
The EUR 5.8 bln will not be Enough
By undermining trust in the Cypriot banking system, and by destroying two Cypriot banks, the Troika is only making problems worse for Cyprus. The deposit flight will take place no matter what capital controls are implemented. This will lead to the need for yet further bank recapitalisation, and will lead to a further investment freeze, a deepening economic depression and higher unemployment.
Ultimately, this “solution”, should any of it be adopted, has set Cyprus on a negative downward spiral. The results are catastrophic.
(c) Philip Ammerman, 2013