Cyprus to End Capital Controls in January, President Says

President Nicos Anastasiades
President Nicos Anastasiades said, “The goal right now is to create the conditions for growth and tackle the serious problem of unemployment, to stabilize the financial system.” Photographer: Petros Karadjias/Pool via Bloomberg

Cyprus plans to lift all restrictions on the movement of money in January, almost a year after becoming the first euro member to seize bank deposits and impose capital controls to avert a financial collapse.

President Nicos Anastasiades said in an interview in Nicosia yesterday that his country will be “the best” at implementing its agreement with international creditors as it tries to claw back to growth after forcing losses on uninsured depositors in the Mediterranean island’s two largest banks.

“The goal right now is to create the conditions for growth and tackle the serious problem of unemployment, to stabilize the financial system,” Anastasiades said. “The controls are being lifted. They will end within a timeframe of January 2014.”

The third-smallest economy in the 17-nation euro area, Cyprus was approved for a 1.5 billion-euro ($2 billion) payout by euro-region finance ministers on Sept. 13. It was the second disbursement under a 10 billion-euro rescue program following the country’s financial meltdown mainly as a result of banking losses on Greek government bonds.

Anastasiades, 66, won elections in February and was charged with following Greece, Ireland and Portugal in securing a full sovereign bailout. He also had to win the backing of the population for austerity measures.

Good Behavior

“What’s important too and a good sign is the behavior of Cypriots, a responsible stance, without reactions, without strikes, labor peace,” he said. “I believe that sooner than expected we will again be in a position to go to markets, but also to create encouraging prospects for the country.”

The International Monetary Fund also this week approved its 84.7 million-euro contribution to the payment, with Managing Director Christine Lagarde saying the country had made “commendable” progress in stabilizing its finances.

“Risks to the program remain substantial, leaving no room for implementation slippages,” Lagarde said in a statement issued on the Washington-based fund’s website. “Continued strong ownership, including steadfast policy implementation, is critical for the program’s success.”

Anastasiades, who said in April that his country had been used as a guinea pig for Europe to test the effect on enforcing losses on unsecured deposits, said Lagarde’s message was proof Cypriot “discipline” had been acknowledged.

Shrinking Economy

The Cypriot economy contracted an annual 5.9 percent in the second quarter of the year, following a 5 percent drop in the first quarter. Gross domestic product is set to shrink a cumulative 13 percent in 2013 and 2014 under the weight of the austerity measures and as the country’s financial industry shrinks, international creditors said on July 31.

Capital controls also sparked fears among tourists that they would be unable to withdraw cash, contributing to a decline of 5.3 percent in 2013 arrivals to the end of August. German tourism arrivals were down 36 percent in August.

While Russian investors, primarily in the two biggest banks, suffered losses, Russian tourist arrivals marked a 25 percent increase in August. In a nod to cash concerns, Russian banks are advertising at Larnaca airport, the country’s main gateway, pitching credit cards that give “immediate access to money wherever you are” in Greek and Russian.

Russian Trust

Anastasiades says it’s an indication of trust that while some Russian capital moved out of the country, Russian businessmen continue to base their headquarters on the island.

“Germany, and other European Union nations, are partners and friends, but we need to say this for the Russians as well,” said Anastasiades. “The Cypriot economy was supported by Russian capital, investments, financial services.”

Cyprus and Russia last week signed the terms of an agreement to cut the annual interest rate of a 2.5 billion-euro loan and extend the payment schedule. The revision will be a direct financial benefit of 160 million euros for Cyprus, according to the Finance Ministry.

Alongside dismantling capital controls, Anastasiades said his priority is to give fresh impetus to failed attempts to unify his island, the last divided country in Europe.

One of the few local politicians to support a 2004 UN-brokered reunification plan rejected by Greek Cypriots, Anastasiades said the economic crisis is a catalyst to a new attempt to solve the 39-year-old division.

1974 Invasion

Turkey invaded Cyprus in 1974 after a coup by supporters of union with Greece. It keeps about 30,000 troops in the north and is the only country to recognize a Turkish Cypriot state. Greek Cypriots rejected the UN plan in a referendum on the eve of joining the EU, while the Turks voted in favor.

Belgium, he said, could provide a model for a future federal state while a first step could be the handover of the abandoned former resort town of Famagusta to its legal residents. Rebuilding the town could send a strong signal of cooperation between the two communities.

“It’s up to us to make the crisis an opportunity,” Anastasiades said. “An acceptable solution will contribute greatly to growth.”

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