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The Crisis In Cyprus: Here's What You Need to Know Before the Banks Reopen Tomorrow


Here’s everything you need to know before the action starts at 1000 GMT tomorrow.

Cyprus’ banks will reopen Thursday for the first time in nearly two weeks, setting the stage for a potentially explosive showdown between depositors and state officials.

Here’s everything you need to know before the action starts at 1000 GMT tomorrow:

1. Capital Controls

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The Cypriot government announced Wednesday that it would impose certain “capital controls” meant to prevent a possible run on the banks. Under the new rules, depositors won’t be able to do any of the following [via Reuters]:

  • Cash a check
  • Withdraw more than €300 a day
  • Take more than €3000 in cash per person in any currency out of the country
  • Purchase more than €5000 in foreign goods and services with a credit card each month
  • Make non-cash payments outside Cyprus without documentation showing they are paying for imports

The new rules will apply to all banks, not just the ones involved in the bailout deal. Also, according to the Cypriot government, the rules will only last seven days (if you believe that).

Here's a copy of the final decree from Cyprus' Ministry of Finance [via @faisalislam]:

Still, even with the capital controls announced Wednesday, Cypriot authorities fear as much as 10 percent of the €64 billion on deposit in the country’s banks to be pulled out tomorrow.

2. The European Central Bank Has Flown In Billions Of Euros

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From the New York Times:

To make sure enough cash is on hand, the European Central Bank sent an airplane filled with about 1.5 billion euros in a container to Larnaca airport near Nicosia on Wednesday afternoon. The container was loaded onto a truck and escorted by police cars to the Cypriot central bank for safekeeping, said a person with knowledge of the operation, who requested anonymity because he was not authorized to speak publicly.

3. Massive Amounts Of Cash Have Already Been Spirited Out Of The Country

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An unknown amount of cash has already fled the small Mediterranean country since the start of this ordeal nearly two weeks ago, TheBlaze noted earlier this week.

And although the amount is unknown, it’s feared to be somewhere in the millions (even billions). From Der Spiegel:

the central bank head has been harshly criticized due to suspicious capital flight from Laiki and the Bank of Cyprus, the two institutions that have been hit hardest by the Cypriot banking crisis.

There are indications that large sums flowed out of the two banks just before the first bailout package was signed in the early morning hours of March 16. At the end of January, some 40 percent of all savings held in Cypriot accounts were on the books of those two banks. Since then, however, much of it has been transferred elsewhere, despite orders from the central bank that accounts at the two institutions be frozen.


Many are also furious that the bank allowed "special payments," the definition of which was never adequately established.

The Cypriot central bank has defended itself by saying that it was impossible to completely prevent all transactions, despite the account freeze. Much of the money was withdrawn from overseas, where Cyprus had no authority. Branches of Cypriot banks in non-euro-zone countries such as Russia and Britain do not answer to the European Central Bank. Their liquidity is controlled by central banks in those countries.

Considering that Russian cash accounts for nearly half of all Cypriot deposits, it’s not that surprising that money has quietly slipped out the banks.

Parliament in Nicosia is suspicious. Lawmakers have demanded that the central bank assemble a list of those customers who withdrew large amounts of money prior to the closure of the country's financial institutions. In particular, parliamentarians want to know if central bank employees or members of the government received early warning and were able to quickly rescue their assets.


Holders of smaller accounts…should be prepared for the fact that not all bank services will immediately be available. Those who had more than €100,000 parked at the Bank of Cyprus will likely lose "about 40 percent" of their assets…adding that the exact amount is still being established.

4. State Officials Are Relying On 180 British Guards to Help Keep Things In Check

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This may be the most dangerous thing to watch for tomorrow [via ekathimerin]:

A British security firm that transports cash for Cypriot banks is working round the clock, sending teams out with police protection to stock bank machines and readying guards for when banks reopen on Thursday.

The world’s largest security firm, G4S, moves cash and will provide guards for Cypriot lenders including Bank of Cyprus and Cyprus Popular Bank, the two biggest, which are to be combined and see large depositors’ accounts frozen under a bailout agreed at the weekend.


… 180 G4S guards will be deployed at bank branches to help handle an anticipated surge of customers demanding cash and answers.

 "The staff will be based outside branches and are there to control queues, if there are any queues," said John Arghyrou, managing director of the Cyprus business for G4S. "We will be in contact with the police. Basically it is to make the banking people feel safe and the customers as well."

And here’s something worth keeping in mind when bank reopen tomorrow: “The firm achieved notoriety for admitting just weeks before the start of last year’s London Olympics that it could not provide a promised 10,400 venue guards, hitting its profit and reputation.”


5. Long-Term Consequences

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Don’t be fooled into think that the damage will be short-lived [via MarketWatch]:

In a paper released Wednesday, economists Lubomir Mitov and Mikis Hadjimichael at the Institute of International Finance say the Cyprus economy may contract as much as 20% over the next three years.

How bad is that? To put it in perspective (and this analysis is MarketWatch’s, not IIF’s), Detroit’s economy contracted about 17% between 2007 and 2009, per Commerce Department data.

The IIF economists reckon the combination of the activity drop caused by the bank holiday, the loss in national wealth from bank deposits, property prices and other assets, as well as the forced downsizing of the financial services, will ravage the economy. The only positive is the possibility of developing offshore gas reserves (though there’s the issue of Turkey’s disagreement on the matter).

6. Things Are Already Extremely Volatile In Cyprus

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According to Forbes, life in Cyprus has been “hellish” for the past 10 days:

Bank runs. Cash-only service. (The financial sector has been shuttered for more than a week.) Waiting to see what the Germans do to your country… So, in essence, a return to the 19th and early 20th centuries.

“The implications of the decision to place the burden of a bail-in on a small number of uninsured depositors may not be felt immediately, as the process of transferring assets to Bank of Cyprus from Laiki will take some time,” says IHS Economics’ Sean Harrison.

“The current capital controls will most likely be lifted gradually in an attempt to prevent massive capital flight. Signs of a cash economy have begun to emerge and may increase in scope in the coming weeks, as more suppliers are demanding cash payment upfront due to being cut off from credit. The deal could take weeks if not months to feed through to the economy.”

7. The Head of the Bank of Cyprus Has Been Sacked

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Things are just as chaotic at the executive level [from the BBC]:

Bank of Cyprus chief executive Yiannis Kypri confirmed he had been removed as head of the bank, which is the country's largest commercial lender.

Reuters reported that Mr Kypri had issued a statement about his removal, which said: "The reason I was given was that, based on the resolution decree recently passed by parliament and upon demands of the troika, an administrator had been appointed at the Bank.

"Until now I have not received a formal letter from the governor of the Central Bank on the matter."

A European Commission spokesman denied that the troika had demanded Mr. Kypri's removal.

Lastly, it’s worth noting that this is the first time that the EU has imposed capital controls on a member state.

As many analysts have already noted, strict controls and a rush to withdraw funds may be the very thing to collapse the Cypriot economy and force it out of the EU, leading to a much bigger collapse.

Follow Becket Adams (@BecketAdams) on Twitter

Featured image Getty Images. This post has been updated.

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