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ECB President Mario Draghi has said the initial plan to make small savers pay for the Cyprus bailout was “not smart”.
Mario Draghi said a proposal to make “insured depositors” pay did not come from the European Central Bank, the European Commission or the IMF.
He said the proposal only arose in talks with the Cypriot authorities, and was “swiftly corrected”.
Mario Draghi was speaking after the ECB held eurozone interest rates at 0.75% again.
It was the ninth month in a row that the interest rates had been kept unchanged, but Mario Draghi indicated that the ECB was ready to act, if necessary.
He also suggested that the problems seen for some time in smaller, weaker economies such as Spain, were spreading to stronger economies.
Cyprus eventually agreed a 10 billion-euro ($12.8 billion) international bailout, which will see depositors with more than 100,000 euros lose some of their savings.
Accounts which have less than 100,000 euros in them will not be affected, but would have been under the original bailout proposals.
ECB President Mario Draghi has said the initial plan to make small savers pay for the Cyprus bailout was not smart
Speaking about the bailout, Mario Draghi said that the initial plan to impose a levy on all depositors “was not smart to say the least”.
He said the ECB did not envisage savers covered by a guarantee – that is, those with up to 100,000 euros in savings – being forced to contribute towards the country’s rescue plan.
“You have a pecking order, and here the insured depositors should be the very last category to be touched,” he said.
“The [European] Commission draft directive foresees exactly this.”
Mario Draghi also told a news conference that the Cyprus bailout was not a blueprint for what would happen in further bailouts.
“Cyprus is no template,” he said.
Mario Draghi was asked whether it would have been better for Cyprus to leave the euro.
“What was wrong with Cyprus’s economy doesn’t stop being wrong if they are outside the euro,” he said.
“So, the fiscal budget stabilization, consolidation, the restructuring of the banking system would be needed anyway, whether you are in or out. To be out doesn’t preserve the country from the need for action.”
Leaving the euro would entail a big risk for Cyprus, and that an exit from the currency could find the country having to pursue reforms “in a much more difficult environment”, he added.
Mario Draghi also said that the recent crisis in Cyprus had “reinforced the Governing Council’s determination to support the euro”.
Despite continuing signs of economic weakness across the eurozone, the ECB president said rates were on hold “for the time being” by consensus.
He said he expected to see a gradual economic recovery in the second part of 2013.
However, Mario draghi said that growth was “subject to downside risks”. Risks included slow implementation of structural reforms by governments, or weak domestic demand.
“These factors have the potential to dampen the improvement in confidence and thereby delay the recovery,” he added.
After his comments the euro fell to its lowest level in more than four months against the dollar, to $1.2745 – the weakest since mid-November – before recovering its losses.
However, Mario Draghi said that inflation would be contained in the medium term, but the bank would act if necessary.
“Our monetary policy stance will remain accommodative for as long as needed,” he said.
“In the coming weeks, we will monitor very closely all the incoming information on economic and monetary developments, and assess the impact on the outlook for price stability.”
Mario Draghi also reiterated that the ECB could not step into the gap left by a lack of action by eurozone governments to solve the region’s debt crisis,
“We cannot replace lack of capital in the banking system or the lack of actions by governments. The most stimulative measures is to pay the arrears.”
The latest indication of the state of the eurozone economy came on Thursday from financial information service Markit, which said the region’s economic contraction had worsened last month.
Its closely-watched composite purchasing managers’ index (PMI), which tracks both the services and manufacturing sectors, also suggested that the German economy slowed to “near stagnation” last month, while France’s recorded its biggest contraction for four years.
The Cypriot banks offered depositors really good rates of interest – as high as 4.75% for long-term accounts – which attracted not only local people, but also hordes of foreigners.
How could the banks afford to pay such great rates? By investing the money from those “savers” in something that itself paid really great rates of interest: Greek government bonds.
When Greece got bailed out, the value of the bonds was cut in half.
But that wasn’t all. The fat interest rate that those bonds were paying was also cut – to just 3.5%.
The Cypriot banks offered depositors really good rates of interest which attracted not only local people, but also hordes of foreigners
That meant Cyprus’ banks had a lot less money coming in the door. But they still had to pay their depositors – and in some cases they’re paying depositors more than they’re getting from the bonds.
In other words, the Cypriot banks are deep in debt, and they’re not making enough money to make their interest payments. They’re on the verge of going bust.
For help, the banks turned first to their European neighbors, who agreed to lend them some cash. They’ve now got more money coming in the door, but it’s not enough. Now they need to attack the problem at the other end, by reducing the amount they owe.
Who do they owe money to? The depositors.
Now, some of those depositors are protected – accounts under 100,000 euros are insured.
Cyprus is taking a big chunk of the money in those accounts – around 40%.
The 40% “tax” on those big accounts does two things. First, it brings money into the door of the banks, giving them more money to operate with. Second, it reduces the amount of interest they have to pay to those account holders each month.
Cyprus banks have reopened after a two-week closure sparked by the EU-IMF bailout negotiations, amid tension over possible large scale withdrawals.
Branches were replenished with cash overnight and police and private security guards deployed amid fears of a run on the banks by customers.
Banks customers face strict controls on the amount they can withdraw each day.
The restrictions on the free movement of capital represent a profound breach of an EU principle.
Cyprus banks have reopened after a two-week closure sparked by the EU-IMF bailout negotiations, amid tension over possible large scale withdrawals
However, the European Commission on Thursday justified the move, saying the “stability of financial markets and the banking system in Cyprus constitutes a matter of overriding public interest”.
Cyprus is the first eurozone member country to bring in capital controls.
Cyprus needs to raise 5.8 billion euros to qualify for a 10 billion-euro bailout from the EU, ECB and the IMF, the so-called troika.
As part of the bailout plan, depositors with more than 100,000 euros in Cypriot banks will see their savings taxed in exchange for bank shares.
An earlier plan to tax small depositors was vetoed by the Cypriot parliament last week.
Branches began to open at noon local time and will close at 18:00.
Some armed police have been deployed and hundreds of staff from the private security firm G4S are guarding bank branches and helping to transport money.
The stock exchange, shut since March 16, remains closed on Thursday and will not reopen until after Catholic Easter.
In a statement issued on Wednesday, the ministry of finance insisted the capital control measures were temporary and were needed to “safeguard the stability of the system”.
It read: “The Central Bank of Cyprus and the government of Cyprus will review them each day, with a view to progressive lifting of the measures as soon as circumstances allow.”
The severe new rules have been imposed to prevent a torrent of money leaving the island and credit institutions collapsing.
As well as the daily withdrawal limit, Cypriots may not cash cheques.
Payments and/or transfers outside Cyprus via debit and or credit cards are allowed up to 5,000 euros per person per month.
Transactions of 5,000-200,000 euros will be reviewed by a specially established committee, with applications for those over 200,000 euros needing individual approval.
Travellers leaving the country will only be allowed to take 1,000 euros with them.
On Wednesday night, hundreds of protesters rallied outside the presidential palace, chanting: “I’ll pay nothing; I owe nothing,” the Reuters news agency reported.
Many economists predict the controls could be in place for months.
The unprecedented restrictions represent a profound breach of an important principle of the EU that capital, as well as people and trade, should able be to move freely across internal borders.
However, the European Commission said member states could introduce capital controls “in certain circumstances and under strict conditions on grounds of public policy or public security”.
But it added that “the free movement of capital should be reinstated as soon as possible”.
Cyprus banks are to reopen on Thursday at 12:00 p.m. local time, two weeks after they closed to prevent a bank run as a controversial bailout was negotiated.
Banks will open their doors between 12:00 and 18:00 local time, the Cypriot central bank said.
Customers will also be limited to withdrawing 300 euros ($383) a day, to prevent everyone fleeing with their savings.
“I am telling you that all banks are definitely going to open tomorrow,” the Cypriot central bank’s Aliki Stylianou said, which comes after several false announcements of when bank customers will be able to access their funds.
Capital controls are to be imposed as Cyprus seeks to raise 5.8 billion euros to qualify for a 10 billion-euro bailout from the EU, ECB and the IMF, the so-called troika.
Cyprus banks are to reopen on Thursday at noon, two weeks after they closed to prevent a bank run as a controversial bailout was negotiated
Cyprus Finance Minister Michalis Sarris announced a long-awaited series of capital controls, including the 300-euro daily withdrawal, and no cheques can be cashed.
Michalis Sarris cited the “lack of substantial liquidity and significant risk of deposits outflow, with possible outcome the collapse of the credit institutions” as the reasons for the restrictions.
Depositors in Cypriot banks with more than 100,000 euros could see 40% of their funds converted into bank shares, while those with less than 100,000 euros will not lose any funds – but face limits on what funds they can access.
Speaking to the Financial Times, Michalis Sarris said that the controls would be reviewed after seven days, and that some banks could be exempted altogether.
Other controls will prohibit people from taking more than 1,000 euros in cash outside the island, with customs officers authorized to make checks at border crossings.
Money transfers outside Cyprus are prohibited, with a few very specific exceptions, and there is a limit of 5,000 euros a month in credit or debit card purchases while abroad.
The new measures mean that Cyprus is the first eurozone nation to impose capital controls – the absence of which is a fundamental reason behind the monetary union of the 17 members of the euro bloc – since the debt crisis began.
Concern about the ongoing situation in Cyprus has continued to weigh on the Athens stock market, with Greek shares ending down 4% on Wednesday.
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 Yiannis 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 Yiannis Kypri’s removal.
“These reports are not correct and decisions like this would in any case be the responsibility of the Bank of Cyprus,” he said.
An administrator has been appointed to Bank of Cyprus to restructure the bank. It is being merged with the “good” parts of the failed Laiki Bank, which will be closed down.
Bank of Cyprus chairman Andreas Artemis handed in his resignation on Tuesday, along with four other directors, but the bank’s board rejected the resignations.
Now Panicos Demetriades, the central bank governor, has sacked the entire board, according to the Cyprus News Agency.
Panicos Demetriades was widely criticized on Tuesday for suggesting that Bank of Cyprus was going to be wound up in the same way as is planned for Laiki Bank.
His comments led to demonstrations, calls for his resignation from Bank of Cyprus staff, and a hastily-drafted denial from Finance Minister Michalis Sarris.
Panicos Demetriades said “superhuman” efforts were being made to get the banks ready for reopening on Thursday.
“Indications are that banks will open tomorrow with some restrictions on capital,” said central bank spokeswoman Aliki Sylianou, speaking to the country’s state broadcaster on Wednesday.
The banks have been shut since March 15 while the controversial 10 billion-euro bailout was being negotiated.
Cypriot Finance Minister Michalis Sarris has confirmed that the depositors with less than 100,000 euros in their accounts “will not be hit”.
People with more than 100,000 euros in their accounts could see about 40% of their deposits converted into bank shares, Michalis Sarris said.
“The exact percentage is not… yet decided but it is going to be significant,” he said.
The final figure will depend on how the government decides to protect pensions.
The finance minister confirmed that all Cypriot banks will remain closed until Thursday and that capital controls will be placed on the size and the amount of money people will be allowed to withdraw once they have reopened.
Cyprus bank deposits over 100,000 euros could be cut by 40 percent
These restrictions would “probably be a bit stricter” on the country’s two largest banks, Bank of Cyprus and Laiki, and would remain in place until the banking system “stabilizes”, Michalis Sarris said.
The exact details of this “two tier system” would be hammered out with the banks later on Tuesday, he said.
Michalis Sarris is expecting “some bleeding, some outflow” of funds once the banks reopen, but believes that once EU bailout funds begin flowing “in a matter of weeks”, confidence will return.
Although the economy would be badly hit by the economic crisis, Michalis Sarris admitted, he maintained that it could benefit from “an energy boom”, referring to the exploratory Aphrodite gas fields off the southern coast of the island.
“Yes, there will be a problem but we will overcome it in a relatively short period of time,” he said. He also said his government had renegotiated more favorable loans terms with Russia.
The Cypriot authorities had said all but the biggest two banks would open on Tuesday.
Banks have not been open since March 15. Their reopening had been expected after Cyprus agreed a deal with the IMF and the EU that releases 10 billion euros in support.
It was conditional on Cyprus itself raising 5.8 billion euros, most of which looks likely to come from depositors with more than 100,000 euros in Bank of Cyprus and Laiki or Popular Bank.
The banks remained closed after the country’s first money-raising solution, which would have hit smaller deposit holders as well as larger holdings, was rejected by parliament.
The new deal for Cyprus, unlike previous agreements, does not require parliamentary approval. It will also include austerity measures and tax increases.
Laiki will be shut down, and deposits under 100,000 euros, which are guaranteed by the state under EU law, will move into the Bank of Cyprus to create a “good bank”.
Deposits above that insured amount will be frozen and used to pay Laiki’s debts and recapitalize the Bank of Cyprus, with depositor losses eventually converted into shares.
Major depositors, many of whom are wealthy Russians, will not be able to access accounts exceeding the 100,000-euro limit until the restructuring of the banks is complete.