June 24, 2024

High & Low Finance: In Ireland, Dire Echoes of a Bailout Gone Awry

Now we learn that it was based in no small part on manipulative lies by venal bankers.

The leak of audiotapes of phone conversations between top officials of Anglo Irish Bank, which was by far the worst of a very bad lot, has stunned Ireland and damaged its relations with Germany.

It now appears that the bank lied to Irish officials about how much trouble it was in when the government, at the end of September 2008, guaranteed all the bank’s liabilities.

On one tape, John Bowe, Anglo Irish’s director of the treasury, conceded that he had no rational basis for telling the government that 7 billion euros was all it would take to rescue the bank.

“If they saw the enormity of it up front, they might decide, they might decide they have a choice,” he said to his colleagues in a tape disclosed by The Irish Independent. “They might say the cost to the taxpayer is too high.”

It was important for the problem to look “big enough to be important, but not too big that it kind of spoils everything.”

The problem certainly did “spoil everything” and continues to do so. The Anglo Irish bailout turned out to cost tens of billions of euros from Irish taxpayers and the European Union. Had Irish officials acted more wisely then, the country would still be in bad shape now, but the cost to the government would be much lower. There probably would have been less need for the continuing austerity that has, once again, caused Ireland to lapse into recession.

But by then, the basic problem had been created. Ireland had inflated a property bubble far greater than the American one, and losses were going to be immense when prices collapsed. Regulators were clueless, or worse, about what was actually happening. There seems to have been no one in the government who was truly familiar with the bank. Outside experts were called in, but it is not easy during a crisis to evaluate something from scratch.

At the time, however, it was easy to think that the situation was not as bad as it turned out to be. Irish real estate prices had not collapsed — that would come soon — and it seemed possible that the problems affecting Irish banks, particularly Anglo Irish, were temporary.

The word was liquidity. If that was the only problem a bank had — if there was a temporary difficulty in raising money to reassure depositors but the underlying loans were solid — then a bailout could work with little or no long-term cost. But if the real problem was one of solvency, a bailout risked throwing good money after bad.

Two weeks before the Irish bank guarantee, the financial world was shaken by the collapse of Lehman Brothers in the United States. It showed that large financial institutions were interconnected in ways that no one had really considered before and quickly led to a consensus that the American government had erred in not somehow keeping Lehman afloat.

We now know that Lehman was broke, but at the time it appeared to have ample capital. What was missing, one leading American regulator assured me at the time, was a requirement that the bank retain sufficient liquidity to deal with a panic.

In that atmosphere, it may be understandable that Irish officials fell for the tempting story that there was no real problem, just a bit of unfounded panic. But once they did, the power shifted to the bankers. The tapes show that the bankers were furious about government delays in releasing money once the guarantee was offered.

“You’re putting the government at risk with your delays,” said David Drumm, Anglo Irish’s chief executive, in discussing what he would say to officials at a meeting. Talk of due diligence was ridiculous. Ireland had told the world “we’re all solvent.” Now, it should simply write “a two or three billion check and get on with it.”

He described such a check as “very small.” Relative to the ultimate cost, he was right.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/07/05/business/in-ireland-dire-echoes-of-a-bailout-gone-wrong.html?partner=rss&emc=rss

Lots of Talk, but Little Agreement, on How Europe Should Rescue Banks

The effort was aimed at breaking the so-called doom loop, in which struggling governments take their states deeper into debt to save their banking systems, only to face sky-high sovereign borrowing costs.

Diplomats said ministers would try to reach a deal at a meeting on Wednesday.

On Thursday, as part of the effort to address the banking issue, the 17 ministers from the euro area agreed to allow a rescue fund to pump money directly into failing banks during the second half of next year.

But in the second day of talks, as ministers from the 10 remaining non-euro countries in the European Union joined the meeting, there was deadlock over how to stop disorderly bank bailouts from turning into national fiascos.

Olli Rehn, the economic and monetary affairs commissioner for the European Union, said Friday that he expected the thorny issues to force the meeting to run into Saturday morning.

“Midsummer is the longest day of the year, so we have plenty of time for finding an agreement tonight,” Mr. Rehn said. But diplomats said later that there was a chance that ministers would need to reconvene next week to try to reach a deal.

The rules being discussed on Friday would specify the order in which investors and creditors have to absorb losses so taxpayers do not have to bear the burden. Delegates were divided over how, and whether, to allow countries discretion to protect certain classes of creditors.

A deal could help prevent a recurrence of the chaos that ensued during a bailout for Cyprus in March, when governments and international lenders argued over how to impose losses on investors in the country’s troubled banks. The Cypriot bailout was so chaotic that an initial plan to penalize savers with less than 100,000 euros was abandoned in favor of a deal that penalized only larger savers.

A deal also would allow the leaders of the European Union’s 27 member states to endorse the policies at their meeting late next week in Brussels, their last scheduled summit meeting before the summer.

The tools discussed on Friday would become important building blocks in the future for a possible banking union, which includes a single supervisor under the European Central Bank overseeing about 150 of the bloc’s largest lenders. It is supposed to go into force in the middle of next year.

The knottiest issue on Friday was a split between countries like Britain, which wants to retain some flexibility on how to impose losses, and those like Spain, which was demanding a fixed rule book. The worry for Britain is that automatic losses for some creditors could set off fears of losses at other institutions, which could start bank runs. But Spain wants to ensure that bank investors do not flee to more prosperous countries like Germany, where mechanisms for resolving bank problems might be better capitalized and could be used to shield creditors from losses.

A proposal put forward by the Irish delegation, led by Michael Noonan, the country’s finance minister, would give countries like Britain the flexibility to choose where losses would fall as long as 8 percent of a failing bank’s total liabilities were wiped out first.

But that proposal was failing to gain traction. Sweden protested that the figure was too high.

The Dutch and the Germans said the Irish figure was too low, and they complained it still could induce risky behavior if bankers were overly confident of relying on mechanisms like national bailout funds to come to their rescue.

Article source: http://www.nytimes.com/2013/06/22/business/global/lots-of-talk-but-little-agreement-on-how-europe-should-rescue-banks.html?partner=rss&emc=rss

DealBook: R.B.S. Chief to Step Down

Stephen Hester, chief of the Royal Bank of Scotland.Oli Scarff/Getty ImagesStephen Hester, chief of the Royal Bank of Scotland.

LONDON – Stephen Hester, the chief executive of Royal Bank of Scotland, announced on Wednesday that he was leaving the bank.

Mr. Hester helped navigate the bank after it received a multibillion-dollar bailout from the British government during the financial crisis.

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He has overseen a major overhaul of R.B.S., which has shed hundreds of billions of dollars of assets and shrunk its investment banking operations.

Earlier this year, R.B.S. said that it hoped to be in a position by the middle of 2014 that would allow the government to start reducing its 81 percent stake in the bank.

Mr. Hester said he would have liked to have overseen the privatization process, but the board had decided that a new chief executive would be needed to lead that effort. Analysts said it could take up to eight years to complete the process.

“While leading that process would be the end of an incredible chapter for me, ideally for the company it should be led by someone at the beginning of their journey,” Mr. Hester said in a statement. “I will therefore step down at the end of this year.”

Mr. Hester is expected to depart with a salary and pension package worth up to $8.8 million.

Article source: http://dealbook.nytimes.com/2013/06/12/r-b-s-chief-to-step-down/?partner=rss&emc=rss

Greek Tax Crackdown Yields Little Revenue

Politicians, business executives and bankers are being raked through the headlines or incarcerated in a white-collar crackdown as the Greek government goes after people suspected of tax dodging. Those under questioning include the former finance minister George Papaconstantinou, in a highly charged parliamentary investigation into his handling of a list of Greeks with foreign bank accounts.

“Why do you think they are catching all these people?” Mr. Papaconstantinou said in a recent interview, in the suffer-no-fools manner that defined his two years as finance minister until the current government took power last June. “Because we changed the laws to allow the government to do this.”

But those changed laws, and the populist pursuit of supposed deadbeat fat cats, have yielded little in additional tax revenue.

Tax evasion lies at the heart of the Greek financial collapse, which has resulted in international bailout loans exceeding 205 billion euros, or $266 billion, the size of Greece’s depressed economy. In fact, Greece’s international creditors have made revamping its notoriously lax tax system a primary condition for any additional bailout financing.

But even after an overhaul of Greece’s tax collection apparatus — and a politically charged campaign to pursue delinquents — government officials have collected only a tiny fraction of what is owed and potentially collectible.

Rather than capture a lot of extra money, the crusade seems mainly to have captured prominent quarry. The net cast by newly empowered prosecutors has snared the former mayor of Salonika, the leader of the Greek national statistical agency and several former cabinet members.

Lawyers and tax officials estimate that hundreds of people have been locked up in the last year, suspected of tax evasion. Under the new laws, someone who owes the government more than 10,000 euros in taxes can be arrested on the spot and given the choice between paying up or being put behind bars. While held, the suspect can wait as long as 18 months before the prosecutor decides on a formal charge.

Despite those efforts, of the estimated 13 billion euros that government officials say is owed by Greece’s 1,500 biggest tax debtors, only about 19 million euros has been collected in the last two and a half years.

Among the few to benefit from the crackdown have been criminal defense lawyers specializing in tax law. Among them is Michalis A. Dimitrakopoulos, who represents many of the top political and business figures under government investigation or behind bars. His clients include the daughter and the former wife of Akis Tsohatzopoulos, a former defense minister and Pasok party official, all of whom are on trial on charges of money laundering and taking kickbacks.

Mr. Dimitrakopoulos, who proudly shows visitors to his office a wall covered with framed clippings of his courtroom exploits, says business has never been better. But he also says he has clients with many billions of euros overseas who will never bring their money back to Greece as long as — as he contends — killers have better legal rights than tax offenders.

By any measure, that is hyperbole.

Legal specialists note, for example, that Mr. Papaconstantinou, the former finance minister, is awaiting the outcome of the parliamentary inquiry in his case from the comfort of his suburban Athens home. They say it is unlikely he will ever serve time.

Mr. Papaconstantinou declined to discuss the allegations against him: that he doctored the so-called Lagarde list, named for Christine Lagarde. Ms. Lagarde, now managing director of the International Monetary Fund, was the French finance minister in 2010 when she gave Mr. Papaconstantinou a computer disk containing the names of Greeks who had Swiss accounts with HSBC Bank. The file had been stolen by a French former employee of the bank and ended up in the hands of France’s government.

Article source: http://www.nytimes.com/2013/05/13/business/global/greek-tax-crackdown-yields-little-revenue.html?partner=rss&emc=rss

Chrysler Reports a Profit Drop of 65%

DETROIT – Chrysler Group said Monday that its net income fell 65 percent in the first quarter, to $166 million, as the automaker spent heavily to prepare for new product introductions.

Chrysler, the smallest of Detroit’s three auto companies, said revenue dropped 6 percent in the quarter, to $15.4 billion despite an 8 percent increase in new vehicle sales. The weaker results indicated that Chrysler is still solidifying its comeback from a government bailout and bankruptcy in 2009.

But the company’s chief executive, Sergio Marchionne, reaffirmed earlier forecasts that Chrysler would earn $2.2 billion for the full year on revenue of $72 billion or higher.

“We remain on track to achieve our business targets, even as the first-quarter results were affected by an aggressive product-launch schedule,” said Mr. Marchionne, who is also chief executive of Chrysler’s parent company, the Italian automaker Fiat.

Fiat, which owns 58.5 percent of Chrysler, is scheduled to report its first-quarter results later today.

The first-quarter results mark Chrysler’s seventh consecutive profitable quarter. The company reported that it sold 563,000 vehicles worldwide during the three-month period, an 8 percent increase from the same period a year ago. Most of the additional sales came in the United States, where Chrysler said its market share improved slightly to 11.4 percent, up from 11.2 percent in the same period in 2012.

Chrysler’s turnaround since the recession has been built on reviving core products, like Jeep sport utility vehicles and Ram pickups, as well as bringing out new models like the Dodge Dart compact car. Competition is increasing among all automakers in the American market, which is growing while demand is sliding in Europe and other important international markets.

Chrysler said its lower profits in the quarter reflect costs associated with the introductions of new versions of its Jeep Grand Cherokee S.U.V. and heavy-duty Ram pickup, and second-quarter production of the new Jeep Cherokee.

The company said its cash reserves improved to $11.9 billion during the quarter, up from $11.3 billion a year ago. Its overall debt was $12.5 billion, about the same as it reported in the first quarter of 2012.

Article source: http://www.nytimes.com/2013/04/30/business/chrysler-reports-a-profit-drop-of-65.html?partner=rss&emc=rss

Economic Scene: Solutions Remain Elusive After Financial Crisis

Two things struck me about the conclave. The first was hearing George Akerlof, a Nobel-winning economist from Berkeley, take to the lectern to compare the crisis to a cat stuck in a tree, afraid to move.

The second was realizing how, after five years of coping with the consequences of the disaster, there is still so much uncertainty about what policies are needed to prevent another financial shock from tipping the world economy into the abyss again a few years down the road.

“We don’t have a sense of the final destination,” said Olivier Blanchard, chief economist of the monetary fund. “Where we end I really don’t have much of a clue.”

In determining what is a sustainable level of government debt, or whether central banks should focus on anything other than inflation, or what should be done to prevent further bubbles from destabilizing economies, he argued “we are still very much navigating by sight.”

If you are one of the nearly five million American workers who have been unemployed for over six months, or one of the six million Spaniards, three million Italians or 1.3 million Greeks without a job or a clear prospect of finding one, this amounts to a tragedy.

Considering that the large and complicated financial institutions that set off the crisis five years ago have only gotten larger and more complex, the gap in knowledge is downright scary.

It is scarier to consider how politicians have chosen to ignore much of what the profession has learned from the experience.

Berkeley’s David Romer counted six shocks that hit the United States in the last three decades alone. The economy dodged the bullet in two — the Latin American debt crisis of the 1980s and the Russian default in the 1990s, which led to the bailout of a hedge fund, Long-Term Capital Management.

It took a hit in three — the collapse of much of the savings and loan industry in the late 1980s, the 1987 stock market crash and the dot.com implosion. But it got hammered in the last one.

Economists used to think it was obvious how to contain such shocks. No point trying to stop a bubble from inflating, they thought; it would be impossible to identify in the first place. The best a central bank like the Federal Reserve could do is stand ready to cut interest rates after the bubble burst, patch up the financial system and set the economy back on track. In terms of budgets, governments should aim for a prudent level of debt to retain space to borrow and spend when it was needed.

Now, interest rates have been near zero for years, and growth has not been restored to acceptable levels. And few if any of the economists gathered at the International Monetary Fund’s headquarters in Washington would venture a guess about what level of debt would be prudent these days.

On the eve of the financial crisis, Spain’s net debt was just over 25 percent of its economic output. The ratio of net debt to gross domestic product in Ireland hovered around 11 percent. Martin Wolf, chief economic commentator of The Financial Times, said that Britain’s debt ratio was close to a 300-year low, way below its level during the Industrial Revolution.

It wasn’t low enough, apparently. Five years later, Ireland’s bailout of its banks took its net debt to 102 percent of its economic output. Spain’s debt hit 80 percent of G.D.P. And Britain’s reached 86 percent — the highest since the 1960s.

This is of enormous consequence. One lesson from the crisis — first learned in the 1930s and corroborated in several contemporary analyses — is that when interest rates lose their power to stimulate the economy, additional government spending can help generate real growth. Still, the fear of “excessive” debt has led many governments to cut spending even in the face of economic stagnation.

Countries like Ireland and Spain have pretty much lost their ability to raise money in financial markets. They are now struggling to reduce debt with little success: cutting public spending in the midst of severe downturns only makes economic performance worse, adding to the debt burden.

Yet even in Britain or the United States, which can still borrow at near-record-low interest rates, governments have taken to cutting public spending at the expense of growth and jobs.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Article source: http://www.nytimes.com/2013/04/24/business/solutions-remain-elusive-after-financial-crisis.html?partner=rss&emc=rss

Bailout Terms Are Eased for Ireland and Portugal

Ministers also made some progress on a bundle of initiatives to create a so-called banking union intended to break the vicious circle between indebted sovereign governments and shaky banks that helped unleash a string of crises, repeatedly threatening to sink the euro over the last three years.

The most important step taken by the ministers on Friday was an agreement in principle to extend the maturities of emergency loans made to Ireland and Portugal by seven years. Prolonging the payment schedules could ease pressure on the countries’ public finances and allow them to obtain better terms from private lenders.

Because some of the bailout loans were granted by a fund backed by all 27 European Union countries, the 10 finance ministers from noneuro member states had to give their approval, too, after they joined the meeting Friday afternoon. The extensions must still be approved by the Parliaments of some European Union countries, including Germany.

“This is another very important step forward toward a sustained return to full market financing for both countries,” Olli Rehn, the European commissioner for economic and monetary affairs, said at a news conference after the meeting of finance ministers.

But Mr. Rehn also underlined that officials in Ireland and Portugal had to stick to promises to overhaul their economies, including the kind of painful belt-tightening that has been criticized for restraining growth, leading to wider deficits and making it harder for governments to pay down debt.

“Ultimately it is the combination of growth-enhancing structural reforms and consistent fiscal consolidation that will firmly re-establish investor confidence and ensure that the Irish and Portuguese people can put this very hard crisis behind them and move on,” Mr. Rehn said.

Jeroen Dijsselbloem, the president of the so-called Eurogroup of finance ministers, said at the same news conference that the authorities in Portugal, where the Constitutional Court recently overturned some austerity measures, would be able to pass “compensatory measures” to control spending.

The ministers are struggling to fend off a return to full-blown crisis mode in the euro zone as the ramifications of the Cypriot bailout become clearer and as other concerns, including the perilous state of the economy of Slovenia, another euro member, rise up the agenda.

The Cypriot bailout raised questions about whether efforts to save the euro were on course. Investors were rattled by terms that included raiding the savings of uninsured depositors and by a forecast this last week by the troika of international bodies overseeing bailouts that the downturn in the Cypriot economy over the next two years would be far more severe than expected just weeks ago. Unemployment is already near 15 percent.

The worry now is that Cyprus may eventually need another bailout to keep it as a member of the euro area. On Friday, the ministers gave their political approval to the terms of the bailout, which involves euro zone member states contributing 9 billion euros in loans and the International Monetary Fund providing 1 billion euros. The deal still needs approval by some national Parliaments.

Officials said the first payments of aid to Cyprus from the bloc’s bailout fund, the European Stability Mechanism, could take place in mid-May.

Mr. Rehn said that there would be further aid for Cyprus, but that it would involve directing more structural money to the country, rather than changing the total amount of the bailout.

Cyprus must raise billions of euros to stay within the terms of the bailout, and one option is for its central bank to sell gold reserves. Mario Draghi, the president of the European Central Bank, said at the news conference that the decision would be left to the central bank of Cyprus. But he added that “profits made out of the sales of gold should cover first and foremost any potential loss that the central bank might have” from the emergency liquidity assistance that has been provided by the European Central Bank.

Article source: http://www.nytimes.com/2013/04/13/business/global/euro-zone-finance-ministers-gather-in-ireland.html?partner=rss&emc=rss

Austria Defends Banking Secrecy Rules

DUBLIN — Austria will not knuckle under to pressure to follow Luxembourg in dropping its banking secrecy rules, Finance Minister Maria Fekter said Friday, as she sought to portray Britain as one of the European Union’s biggest tax havens.

“Great Britain has many money laundering centers and tax havens in its immediate legal remit,” Ms. Fekter said, pointing to the Channel Islands, Gibraltar, the Cayman Islands and the British Virgin Islands. Those offshore financial centers are under effective British control, though all but Gibraltar remain technically outside of the European Union.

In a move that could raise pressure on Austria, Herman Van Rompuy, the president of the European Council, said Friday that the Union’s 27 leaders would discuss the issue at a summit meeting next month.

“The current economic crisis only helps to stress the urgent need for fair and effective tax systems,” Mr. Van Rompuy said in a statement broadcast over the Internet.

In an opinion piece Thursday in Kurier, an Austrian newspaper, Ms. Fekter called on the European Union to demand the same openness in financial matters of Britain as it had of Cyprus as a condition for the latter’s bailout.

Ms. Fekter spoke in Dublin on Friday as euro zone finance ministers were beginning two days of meetings in which the subject of combating tax evasion was to be on the agenda. The European tax commissioner, Algirdas Semeta, has said that tax evasion costs European nations about €1 trillion, or $1.3 trillion, in lost revenue each year, and cash-strapped governments are eager to track down their citizens’ hidden assets.

Austria had been sending mixed messages on the topic, with Chancellor Werner Faymann suggesting recently that talks were possible. But Ms. Fekter was adamant on Friday, saying: “Austria is sticking to bank secrecy.”

On Wednesday, Luxembourg bowed to pressure from its European partners in the wake of the collapse of Cyprus’s financial sector and from the United States, which is demanding client data under the Foreign Account Tax Compliance Act, and said it would start sharing banking information with other nations in 2015.

Luxembourg’s change of heart left Austria as the only E.U. member state to not share foreign clients’ data with their home governments. Austria transfers to foreign account holders’ home governments the proceeds of a 35 percent withholding tax on interest income earned in Austrian banks, but it does not disclose the clients’ identities.

“We fight tax evasion and money laundering,” Ms. Fekter said, but added, the “automatic exchange of information involves a massive interference in people’s privacy rights.”

The issue of tax havens has come to the fore in Europe since the release this month by the Washington-based International Consortium of Investigative Journalists of data on thousands of offshore bank accounts and shell companies, and a scandal in France over Jérôme Cahuzac, the former budget minister, who quit after admitting to having foreign holdings that he had previously denied.

Article source: http://www.nytimes.com/2013/04/13/business/global/austria-defends-banking-secrecy-rules.html?partner=rss&emc=rss

Cyprus Bailout to Cost More Than Predicted, Creditors Say

ATHENS — After a chaotic month in which Cyprus was pushed to the brink of default and a possible exit from the euro zone, Cypriots knew things would get bad. But not this bad.

According to a bleak assessment released Thursday by its European partners, Cyprus will fall into a downward spiral for at least the next two years, with the economy contracting up to 12.5 percent over the period as the country prunes back a dangerously outsize banking sector that had ballooned to more than five times gross domestic product.

And because the economy will do worse than expected, Cyprus must soon raise €13 billion — nearly twice the amount the government thought it would have to come up with just a month ago — in order to keep its debt and deficit from spinning out of control and to meet the terms of a desperately needed €10 billion, or $13.1 billion, international bailout secured last month by the newly elected president, Nicos Anastasiades.

A shrinking economy means the country’s budget deficits are likely to grow, so the government will need to raise more money to keep the deficits within limits set out under its bailout agreement. Because the government has also committed to improving the health of its banks, it must come up with yet more money to ensure that the lenders have adequate capital, particularly critical if their loan losses start to snowball as the economy slumps.

“In the short run, the economic outlook remains challenging,” the European Commission said in the report, which details the conditions that the Cypriot government agreed to meet in order to obtain the financial lifeline from the so-called troika: the International Monetary Fund, the European Central Bank and the commission.

So strapped is Cyprus that it has agreed to sell its prized assets to raise money. Chief among them is part of the gold reserves held by the central bank. In what would be the first such sale by a central bank in the euro zone, Cyprus had already agreed to sell €400 million worth of gold, or an estimated 10 tons from its 13-ton stash.

Cyprus’s coffers have run dry as it scrambles to keep its banks from collapsing. On Tuesday, the newly appointed finance minister, Harris Georgiades, said that without the bailout, public funds would run out by the end of April.

Cyprus is under pressure from the troika to speed development of the natural gas reserves that have been discovered off its coast. The hope, as stated in the commission’s assessment, is that the proceeds would be used to keep Cyprus’s debt under control as the economy slumps.

But this could set off a hornet’s nest of geopolitical tension. Turkey, which occupies the north of Cyprus, last month challenged any move by the nation to speed exploration, especially if it means Russian involvement. Turkey warned that it may “act against such initiatives if necessary.”

In the meantime, the commission described a bleak future for Cyprus, at least in the short term.

The nation was required to fold part of its second-largest financial institution, Laiki Bank, known also as Cyprus Popular Bank, into the largest, the Bank of Cyprus, under the terms of the bailout. Numerous companies of all sizes are likely to go shut down as banks cut back on issuing credit. Other lucrative businesses that fed off the bloated financial services industry in Cyprus are also likely to suffer. Real estate prices, which have already begun to fall as a property bubble collapses, are expected to deteriorate further.

Company registered in Cyprus, even as a simple mailing address, are likely to look elsewhere as the corporate tax rises to 12.5 percent from 10 percent. That is still the lowest rate in the euro zone next to Ireland, but it removes one big draw for the country.

Meanwhile, the commission continued in its report, people and businesses that held uninsured deposits at the two largest banks will see a “loss of wealth” as the government takes the unprecedented step of confiscating up to 60 percent of their funds to meet the terms of the bailout deal.

That, combined with extraordinary restrictions on withdrawals in order to prevent a bank run, will in turn cut down on consumption and business investment, the commission added. That will further scar an economy that had already started to slow two years ago as Europe’s long-running debt crisis set in.

Analysts say that once the restrictions are lifted, people are likely to take their money out of Cypriot banks en masse, since few believe the government’s promise that the bank levy being imposed now will be a one-time measure.

A fresh scandal blew through the halls of power this week when the central bank sent a report to Parliament showing that 6,000 people had withdrawn large sums of cash from Cypriot banks in the two weeks leading up to the island’s first bailout agreement. That deal fell apart after the government and European leaders temporarily agreed to a plan that would have confiscated savers’ insured deposits to help Cyprus raise the money its creditors required in exchange for the bailout.

Cypriot banks, already near collapse because of losses from bad loans made mostly in crisis-wracked Greece, as well as losses from holdings of Greek government bonds, could come under new strain, the commission warned, as loans to businesses and individuals start to sour along with the economy.

Unemployment is already near 15 percent and is expected to surge as the financial industry winds down. In the meantime, efforts to recast the economy to lean more heavily on tourism will probably take years.

The report concluded that the only real hopes for the moment seemed to be to drill for natural gas, or for the overall European economy to turn around.

Article source: http://www.nytimes.com/2013/04/12/business/global/cyprus-bailout-to-cost-more-than-predicted-creditors-say.html?partner=rss&emc=rss

Long Lines as Banks Reopen in Cyprus After Freeze

“We were in the Stone Age, and now we’re entering the 19th century,” he said in this village near the capital, Nicosia, after visiting his branch of the Bank of Cyprus, which opened Thursday for the first time since March 15. He cursed the strict new controls that for at least the next week will give him access to only a tiny portion of his money and stop him from cashing checks freely or using his bank to pay suppliers who use different ones.

Across Cyprus, fears that the reopening could lead to a chaotic bank run gave way Thursday to conflicting emotions: relief that bank doors were at least open again, but anger over the new rules, which allow deposits but tightly ration withdrawals.

The restrictions are meant to keep customers from draining their accounts in the wake of the bailout deal announced Monday morning in Brussels. European leaders hailed the deal as saving Cyprus’s teetering banks — and the country as a whole — from collapse.

But the prevailing view in Cyprus is that those leaders have mainly sought to halt a potential financial contagion from spreading by allowing it to devastate Cyprus and its bank depositors.

For Mr. Sofroniou, the bailout terms show that the European Union is driven by the same merciless forces now playing out in the long concrete-and-aluminum sheds of his family farm. “The weakest pigs in the pen don’t eat,” he said. “The strong ones eat everything. This is the law of nature.”

In a daily struggle for meager rations, he said, “The weak ones will be eaten.”

Mr. Sofroniou has a sheaf of checks from customers who have bought pigs from him over the past two weeks. But they were nearly all drawn on accounts at cooperative banks and are not yet honored by the Bank of Cyprus.

Not since the introduction of the euro in January 1999 has a European country blocked bank depositors from having full access to their own cash. Under European Union treaties, such restrictions are normally forbidden. But the European Commission, the union’s administrative arm, issued a statement Thursday morning that the Cyprus controls were legal — though urging that they be rescinded as soon as possible. Originally, the controls were to be in place for one week. But on Thursday, the Cypriot foreign minister, Ioannis Kasoulides, said that restrictions on financial transactions would not be lifted for a month.

Earlier, as banks were preparing to open at noon, local radio stations and Twitter messages pleaded for patience, urging people to show patriotic discipline and not to stampede cashier windows. To make sure that there was enough cash on hand, the European Central Bank flew in a container on Wednesday with about 1.5 billion euros, or $1.9 billion, to the Larnaca airport near Nicosia. The container was then taken under police escort to the Cypriot central bank.

Bank employees started preparing early. Many were given three pages of allowed transactions to which to refer when customers demanded their money. Bags of coins were piled high on a desk at Laiki Bank in central Nicosia, while a manager in a dark business suit stood at the front door waving away a retiree who was trying to enter early.

Some of those in bank lines on Thursday conceded understanding for the rigid restrictions, imposed by Cypriot officials in consultation with the European Central Bank, the European Commission and the International Monetary Fund — the so-called troika of lenders that now largely dictates the fate of Cyprus. The lenders promised the country 10 billion euros, or $12.8 billion, as long as it shrinks a banking sector bloated by money from wealthy Russians and other foreigners seeking to avoid taxes back home.

“They need to control the money,” said Dimitris Dimitriou, the owner of an optical business. He stood in line for 45 minutes in Nicosia to enter a branch of Laiki Bank, which is set to be dismantled as part of the bailout. “Financially it’s been a disaster, for me and for the entire population.”

As security guards let a slow trickle of customers through a revolving door, a small crowd pressed Mr. Dimitriou toward the bank’s entrance, a scene probably repeated in hundreds of spots across the country. But with the police on high alert and extra private security guards called in to prevent disorder, no outbreaks of violence were reported.

Few thought that the banks’ reopening was a return to normality — or even a dependable sign that a bank run was out of the question once the currency controls lift. “People here have not recovered from the shock that has happened to us,” Mr. Dimitriou said. When they do, he said, “a lot more people will want to get their money out of the banks.”

The controls effectively create two classes of the same money, analysts said: the constrained euros in Cyprus, and the fully fungible ones elsewhere.

In Akaki, the village president, Giannakis Chatziyannis, said he feared that “this is just the start of our troubles.” The economic crisis, he said, will get far worse as jobs evaporate — including those at a local Laiki branch set to be shut down. He was supposed to pay his own employees at the end of March but told them they would have to wait.

“Everyone knows that the next 10 years are going to be very bleak,” he said. “We are in a downward spiral.”

Anger at the European Union and its most powerful member, Germany, has reached a boiling point in Cyprus. Even in Akaki, which seems distant from the political passions of the capital, Chancellor Angela Merkel of Germany has become a hated figure. Writing by the roadside entrance to the village referred to her with a vulgarism and said, “Cyprus above all.”

“We are what you call collateral damage,” said Chrysanthos Chrysanthou, a goat and chicken farmer. He blamed the German-led push to reshape Cyprus’s banking industry for leaving his animals on “starvation rations.”

He, too, went to the bank on Thursday and withdrew the limit of 300 euros, far less than he needed to keep his animals fed.

Germany and other lenders “say they want to penalize bankers but are just hurting everyone,” he said. “We are not all bankers. A lot of people here do real work.”

When a supplier of animal feed called to demand cash, he said he could pay only by check. The supplier, who uses a different bank, said no. Throwing down the phone in fury, Mr. Chrysanthou said he had returned to Cyprus in 1994 after years in South Africa but was now thinking of leaving. “I left South Africa after I was robbed by thieves,” he said. “Now I’m being robbed again here.”

Andrew Higgins reported from Akaki, and Liz Alderman from Nicosia, Cyprus. Dimitrias Bounias contributed reporting from Akaki, and Andreas Ris from Nicosia.

This article has been revised to reflect the following correction:

Correction: March 28, 2013

An earlier version of this article referred incorrectly to capital controls in Europe. They have not been applied since the introduction of the euro; it is not the case that they have never been applied.

This article has been revised to reflect the following correction:

Correction: March 28, 2013

An earlier version of this article misstated the surname of the president of the village of Akaki. He is Giannakis Chatziyannis, not Chatzyiannis.

Article source: http://www.nytimes.com/2013/03/29/business/global/cyprus-banks.html?partner=rss&emc=rss