Back to normal: Cyprus lifts capital controls two years after EU bailout

Two years have passed since Cyprus became the subject of an unprecedented measure by European authorities when two of its national banks, Laiki Bank (The Cyprus Popular Bank), and Bank of Cyprus became insolvent.

In March 2013, the two institutions became insolvent and, like many banks in Europe over recent years, were in need of a bailout, however instead of the European central government providing the money, nationalizing the banks then carrying on business as normal as occurred in London in 2008 and 2009, the banks closed their doors, froze all withdrawals as a bank run amassed, and then subjected depositors to a ‘haircut’ of up to 60% on all deposits in exchange for shares in the banks.

This measure, which was termed a ‘bail-in’, created speculation that it may dramatically affect the Cyprus FX industry, however it did not. A calm and even keel was maintained on the island as it remained an attractive jurisdiction in which to establish business, and the past two years have gone by quietly indeed.

Next week, the final end to the situation will take place, when the Cyprus government will remove the last of the capital controls that were imposed two years ago as part of a 10-billion euro European bailout.

Greece had been the first nation in the bloc which became the subject of a European bailout in 2010, followed by several Western European nations, therefore when two of the Cyprus’ major banks hit the buffers just three years later, a measure to make depositors partially accountable was adopted.

In a report by Bloomberg, it was stated that the last restrictions on international transfers will be lifted on April 6, almost a year after domestic capital controls ended in May 2014.

“The lifting of the restrictions confirms the full restoration of confidence in the banking system, the significantly improved business climate and essentially marks the return of the economy to normal conditions” explained Cyprus government spokesman Nikos Christodoulides in a statement to Bloomberg.

The end of the last capital transfer restrictions is the result “of all our hard work and consistency in the implementation of the obligations we undertook,” Cyprus President Nicos Anastasiades said in Nicosia yesterday.

Deposits have shrunk since the crisis, standing at 46.5 billion euros at the end of February compared with 67.5 billion euros in the same month of 2013, and Standard & Poor’s says lifting the controls may put the stability of deposit levels at risk.

“We see uncertainty regarding the impact of the elimination of the remaining controls on international transactions on the stability of private-sector deposits,” S&P analysts led by Marko Mrsnik said on March 27.

A somewhat remarkable absence of consequences is apparent, as although the 2013 crisis severely hurt and changed the Cyprus banking sector, the very large Forex industry based on the island fared much better, with not one client of any Forex broker affected by the bank haircut and subsequent EU bailout.

This can largely be attributed to the corporate structure which many FX brokerages in Cyprus operate under, in which many maintain their operating capital outside of Cyprus and are part of larger entities based abroad, and any client deposits which may be kept in Cypriot banks are exempt from any haircut, as they are not direct customer deposits into retail bank accounts, but instead held in custodial accounts on behalf of the brokerage, therefore a bank cannot take funds from such accounts as the deposit contract is between the broker and client, rather than directly between the bank and a retail depositor.

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