Is Bank of Cyprus being restructured?
by George Hatjoullis
The moment of truth is upon Cyprus. Press reports are of a deal involving a 20% levy on Bank of Cyprus deposits over 100k, but 4% only for other banks in Cyprus. In addition there may be a 1% levy on all deposits and of course Laiki bank will be restructured. However, based on these details one might conclude that BoC is also being restructured although no one has explicitly stated this.
It would be irregular, to the say the least, to apply a differential tax to depositors in different banks. Indeed it may not be legal and is almost certain to be subject to a legal challenge. In contrast a restructuring would involve a charge on uninsured depositors commensurate with the capital needs of the bank in question. It is difficult therefore not conclude that BoC is being restructured and that the 20% levy is indeed a default event.
The most logical economic course of action is to consolidate Laiki and Bank of Cyprus to form one sound, well capitalised bank. The problem is that a great many middle class Cypriot bank workers would not only find their savings have been reduced but also that they are unemployed. This almost certainly is why the previous administration baulked at the idea and delayed all decisions until after the presidential election.
The present administration was handed a poison chalice. They must drink the poison for the good of the nation. Otherwise eurozone exit beckons. Many suggest Cyprus will be better off outside of the eurozone. However, this attributes the benefits of having never joined to exit. This is not the case. There are material costs to exit not the least because, legally, it may also necessitate exit from the EU.