But the situation is now looking even worse than anticipated. Instead of the relatively modest decline of 3 percent that is built into the forecast that underpins the country’s international bailout package, many economists say that estimate will need to be revised sharply downward given the shock that the island’s small economy has endured from the extended closure of its banks.
The bailout package being put together by the troika of international lenders — the International Monetary Fund, the European Central Bank and the European Commission — will consist of about 10 billion euros ($12.9 billion) in loans for Cyprus itself. But the cost of bailing out the island’s two largest banks, Bank of Cyprus and Laiki Bank, is to be borne by the banks’ large, uninsured depositors.
At a news conference on Tuesday, the governor of Cyprus’s central bank, Panicos O. Demetriades, said that he expected big depositors at the Bank of Cyprus to get a “haircut,” or loss, of about 40 percent on their 14 billion euros in long-term deposits. In exchange, depositors will receive shares in a recapitalized bank.
But with many economists now estimating that the Cypriot economy will contract 5 percent to 10 percent this year, it could well be that the depositors will have to take a bigger loss so that the bank can free up cash to protect its rapidly deteriorating loan book.
At Laiki Bank, which is even worse off, about 4 billion euros of deposits will be put in a bad bank and are most likely to be wiped out as the bank is wound down.
Debt experts say that as painful as such a trimming may be, it still may not be enough to guarantee the viability of the Bank of Cyprus, given the state of the economy.
“If you are not hugely conservative with regard to valuing Bank of Cyprus’s loans, the bank will be bankrupt in 12 months,” said Adam Lerrick, a sovereign debt specialist at the American Enterprise Institute in Washington.
As of the third quarter of 2012, problem loans for the bank were 22 percent of the total, one of the highest ratios in the euro zone. That figure will have grown significantly over the last several months, economists here say.
Adding to the sense of confusion enfolding the country’s financial sector, the chairman of the Bank of Cyprus resigned abruptly Tuesday after a showdown with Mr. Demetriades, the head of the central bank, and the finance ministry.
The bank chairman, Andreas Artemis, complained that the authorities rode roughshod over him and his board by moving unilaterally to sell off units of the bank in Greece and for planning to impose the devastating haircut on big depositors.
In a statement later in the day, the bank said Mr. Artemis’s resignation had not been accepted and “will only apply if not withdrawn within one week.”
The government is also struggling to come up with some form of capital controls in a bid to prevent too much money from draining from the banks and leaving the country. Given that more than 30 percent of the Bank of Cyprus’s 14 billion euros in long-term deposits belongs to foreigners — mostly Russians and Greeks — who would not hesitate to take their money out of the country, the restrictions on those funds are likely to be onerous, bankers say.
“That money is going to stay there for a very long time,” said one person who has been involved in the discussions, but who requested anonymity because he was not authorized to speak publicly.
On Tuesday, the Cypriot central bank said it had appointed Dinos Christofides, a well-known local business executive, to act as special administrator for Bank of Cyprus. Mr. Christofides has long experience in auditing and advising major local and international companies.
Landon Thomas Jr. reported from Nicosia; Stephen Castle contributed reporting from London, Liz Alderman from Nicosia and David Jolly from Paris.
Article source: http://www.nytimes.com/2013/03/27/business/global/bailout-grows-riskier-as-cypriot-economy-stumbles.html?partner=rss&emc=rss