Cyprus in limbo

Cyprus, ECB Officials Working on Capital-Control Plans -Sources Read more: Published March 19, 2013 Dow Jones Newswires The contingency plan authorities are working on includes imposing limits on daily withdrawals from bank accounts; capping the amount of money that can be electronically taken out of the country and making these transactions slower to clear; and introducing border checks to ensure no more than a certain amount of cash would be leaving in the country, the officials said. The officials didn't specify the limits to be introduced but one said these were not yet fixed and would depend on an assessment of how severe the deposit flight is once banks reopen. Banks have remained closed since Saturday after the government and officials from the euro zone, the European Central Bank and the International Monetary Fund agreed to a contentious bailout that would impose a one-off levy on bank deposits to help raise part of the country's financing needs. The plan angered savers on the island who were told their cash would go towards lowering Cyprus's bailout needs to EUR10 billion from about EUR17 billion estimated initially and was resoundingly rejected by lawmakers at a parliamentary vote Tuesday. Ahead of the parliamentary vote, Cyprus's central bank governor, Panicos Demetriades, told parliamentarians that he expected EUR7.5 billion, or 10% of all deposits, to flow out of the country just in the first few days after banks reopen. "Every day that banks are closed is a wound," he said, urging Cypriot lawmakers to pass the deposit tax plan and secure the EUR10-billion bailout from the euro zone and the International Monetary Fund. Banks on the island, which were closed Monday for a religious holiday, will remain shut at least until Thursday. Two officials said it was very likely that the banks wouldn't reopen until next Tuesday, March 26. Next Monday is also a scheduled bank holiday to celebrate Greek Independence Day. The bailout had been agreed in part to cover a EUR10 billion shortfall in two Cypriot banks, Laiki Bank and Bank of Cyprus PCL (BOCY.CP), which rely on emergency funds from the country's central bank. Joerg Asmussen, an ECB executive board member, said Saturday Cypriot banks would continue to have access to the Emergency Liquidity Assistance facility--xpensive loans provided by national euro-zone central banks with permission from the ECB for banks that have lost access to ECB financing due to lack of eligible collateral. But Mr. Asmussen noted that liquidity is provided to solvent banks. In a brief statement, shortly after Cyprus's parliament rejected the deposit levy, the ECB reaffirmed its commitment to provide liquidity as needed but "within its existing rules". It said it was in contact with the European Commission and the International Monetary Fund but declined to elaborate further. The ECB declined to comment on the contingency planning. Spokesmen for the European Commission and the IMF didn't immediately comment. The officials familiar with the contingency plans said, however, that should the banks' financing needs increase if there is substantial deposit flight, ELA would be an unaffordable way to fund themselves even if they continued to have access to such funding. One official said the measures were likely to be introduced within the first few hours of the banks reopening after the extended holiday--as electronic orders and ATM requests to remove cash would quickly deplete cash reserves--and could last for "weeks." The officials said neighboring countries had been instructed to be ready to fly euro bank notes into Cyprus should the need arise. But one official said the country still has adequate reserves. All three officials said this kind of planning should come as no surprise: "This is exactly what is to be expected and exactly what was in place for Greece last summer," one official said referring to the critical Greek elections in June 2012 during which depositors were removing large sums of cash out of Greek banks amid mounting speculation that the country might be forced to leave the euro. One official also said the IMF had been tasked with developing a plan to resolve the country's two biggest banks over a weekend and merge their healthy assets into a smaller entity, separating the bad ones into an asset manager, or "bad bank." He did not say who would bear the costs of the resolution. A spokeswoman for the IMF declined to comment. In a sign that some countries are worried about liquidity drying up on the island, the U.K. Ministry of Defence said Tuesday a Royal Air Force flight carrying EUR1 million was heading to Cyprus as a "contingency measure" for U.K. military personnel stationed on the island. A spokesman said the cash was there " in the event that cash machines and debit cards stop working completely." He said the MoD was "proactively approaching personnel to ask if they want their March, and future months' salaries paid into UK bank accounts, rather than Cypriot accounts." Nick Winning in London contributed to this article. 

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