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Cyprus Determined to Keep Place in Euro Area, President Says

Cyprus Determined to Keep Place in Euro Area, President Says
Customers wait in line outside a branch of a Cyprus Popular Bank Pcl, also known as Laiki Bank, in Nicosia on Friday. Photographer: Simon Dawson/Bloomberg

Cypriot President Nicos Anastasiades vowed to keep his country in the euro as Cypriots adapted to a second day of restrictions on their use of the common currency to prevent a financial collapse.

The government averted panic withdrawals yesterday when it allowed banks to open for the first time in almost two weeks, and was able to ease some of those restrictions today. The curbs on access to cash are designed to prevent a run on deposits after Anastasiades forged an agreement with the euro area on a financial rescue that is being funded in part by those with deposits of more than 100,000 euros in the two largest banks.

“We’re not about to leave the euro,” Anastasiades said in a speech in Nicosia, the capital, today. “The dramatic developments in our country must find us united, so that we can successfully implement the Eurogroup accord, remain safely in the euro and continue on the road of the major changes we have begun.”

European officials have urged the country to move quickly to lift the restrictions, the first time that a member of the euro area has imposed controls on the movement of capital. The curbs include a 300-euro daily limit on withdrawals and restrictions on transfers to accounts outside the country. The European Commission said yesterday the constraints must remain “proportionate” and be lifted as soon as possible.

Seven Days

How long the measures will remain in force is unclear. The Cypriot government said in a March 27 statement they will be imposed initially for seven days while Finance Minister Michael Sarris said on March 26 they will end “in a matter of weeks.” The impact of the controls is being monitored daily, the central bank said.

The central bank today published an additional decree lifting all restrictions on credit, debit and pre-pay card transactions within Cyprus and allowing transfers of as much as 300 euros per person per day from notice accounts to checking and current accounts.

Cyprus’s lenders had been shut since March 16, when the European Union proposed forcing losses on all depositors in exchange for a 10 billion-euro ($12.8 billion) bailout. That was rejected by the country’s parliament amid concern its offshore banking industry would be irreparably harmed.

Anastasiades agreed to a new accord on March 25, which shuttered Cyprus Popular Bank Pcl, the second-largest lender, and imposed larger losses on depositors with more than 100,000 euros, after failing to get financial aid from Russia, one of the island’s biggest investors.

April Meeting

Cyprus’s bailout accord will be discussed at a meeting of euro area finance ministry officials on April 4, Greece’s state-run Athens News Agency reported today, citing comments by Cypriot Labor Minister Haris Georgiades.

There were few queues at banks in Nicosia today. The institutions opened at midday local time yesterday to allow staff to prepare and opened for normal business hours today. The Bank of Cyprus, the nation’s biggest lender, which is being restructured as part of the EU deal, said late yesterday that all transactions were smooth.

“You have two euros within Europe because the Cypriot euro is no longer equal to the euro in the other 16 countries,” Pacific Investment Management Co.’s Mohamed El-Erian, chief executive officer of the world’s largest bond-fund manager, said yesterday in an interview on “Bloomberg Surveillance” with Tom Keene. “This is truly a very, very historic time.”

Euro Banknotes

Cyprus’s restrictions include bans on terminating time deposits and cashing checks. Customers can transfer abroad at most 5,000 euros per month from a given financial institution. Euro banknotes were supplied to Cyprus as a precaution, a spokesman for the Bundesbank in Frankfurt said yesterday.

Cyprus in June became the fifth euro-area nation to request a rescue after Greece’s debt restructuring crippled lenders including Bank of Cyprus and Cyprus Popular.

The 18 billion-euro economy is the third-smallest in the 17-nation euro area. Before the bailout, which was coupled with an austerity package, the European Commission predicted a contraction of 3.5 percent in 2013.

Economic Damage

Economists, including Gabriel Sterne, an economist at Exotix Ltd. in London, have said the damage will be far greater as the losses for uninsured depositors and an increase in corporate taxes to secure the bailout hurt the island’s reputation as a financial hub.

“All assumed that there would be a contraction in the economy but nothing like what they are going to have now, so the situation is spiraling down,” Lee Buchheit, partner at Cleary Gottlieb Steen & Hamilton LLP and an adviser on Greece’s sovereign debt restructuring, told Bloomberg Law’s Lee Pacchia in an interview yesterday.

Euro countries such as Malta and Slovenia have been quick to distance themselves from the crisis that forced Cyprus to accept the conditions for the funding with the EU and the International Monetary Fund on March 25.

Conflicting statements from European officials on whether Cyprus’s bailout is a special case or a template for future rescues have fanned concerns.

Frieden Warning

Luxembourg Finance Minister Luc Frieden warned against forcing depositors to contribute to bailouts again, saying it would encourage savers to send money outside the euro area, Der Spiegel reported, citing an interview.

Maltese Prime Minister Joseph Muscat said in a statement late yesterday that his government supports the “one-off measures undertaken with regards to Cyprus.” He said the size of Malta’s domestic banking system is below the euro-area average and is “robust.”

Slovenia’s pledge to continue austerity measures failed to stem a rise in bond yields to record highs yesterday. The cost of protecting Slovenian bonds with credit-default swaps surged 93 basis points to 411, according to data compiled by Bloomberg. That compared with 953 basis points for Cyprus.

“Two weeks ago, very few people knew where Cyprus was,” said El-Erian. “The issue is when the non-systemic case when added to another non-systemic case when added to another non-systemic case can become systemic.”

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