RPT-In Cyprus, the bank run that wasn't

Mon Apr 1, 2013 5:13am EDT

By Karolina Tagaris and Michele Kambas

NICOSIA, March 29 (Reuters) - In the end it was hardly even a stroll, let alone the widely predicted run on the banks of Cyprus.

Commentators had been confident that as soon as the banks reopened on Thursday at noon after Cyprus signed a rescue deal with the European Union to stave off national bankruptcy, there would be scenes of chaos.

The experts were right, but it wasn't the Cypriots causing the pandemonium. Television crews from around the world crowded into tiny Eleftheria Square in central Nicosia, the convenient location of two of the capital's main banks.

If there were a dozen Cypriots waiting patiently to make a withdrawal, there were probably twice as many cameramen, each one as frenzied as the local people were calm.

Reasons for this fortitude are not hard to find in conversations with residents of Nicosia, a sunny and welcoming city with a vibrant cafe culture.

The Greek Cypriots describe themselves as more laid back than their cousins in Greece, where the reaction to the austerity decreed in their own EU rescue deal was mayhem on the streets of Athens.

While a bomb did explode on the day the Cyprus banks ended their two-week closure, the explosion actually happened in Greece.

Cypriots say that they have endured worse, harking back to the war in 1974, when the island was divided after a Turkish military invasion.

Jean Kelly-Christou, Editor-in-Chief of the Cyprus Mail, the island's oldest newspaper, said people were drawing on the lessons of the economic crisis that followed the war.

"I think most people are being pragmatic about it and understand that demonstrations and anger might make things worse," said Kelly-Christou, who is Irish.

STRICT REGIME

A strict regime of restrictions on bank transactions, including a daily limit of 300 euros on withdrawals, has been imposed this week, in what is commonly described as an unprecedented move.

Unprecedented in the short history of euro zone bailouts perhaps - but Cypriots recall they had to endure years of currency controls after the 1974 war.

In any case, much of the anger in Cyprus was probably expended before the deal was done in Brussels on Monday.

An initial version envisaged levying a tax on all bank deposits, large and small, and that infuriated small savers on the island. The final agreement, which only hit those with more than 100,000 euros in the bank, was better received.

The restrictions on bank transactions may also have helped calm the mood. After all, if people can't withdraw more than 300 euros a day, it is difficult to have a full-scale bank run.

Most people do not have 100,000 euros in the bank in any case and were taking comfort from the fact that deposits below that level are protected by insurance.

Many of those waiting in line for the banks to reopen were in fact elderly people who had run short of ready cash. They said they were uncomfortable with bank cards and so unable to use the ATMs that had remained in operation throughout.

Others probably realised that they had just as much chance of getting their money later rather than on day one.

"We were planning to take our money out but we're going to wait ... it's going to be chaos today," Constantina Economidou, a civil servant, said on Thursday.

HIGH FINANCE

Others were equally resigned, or perhaps numbed by the sensation that there were matters of high finance under way which they could not do much about.

"The government hasn't told us exactly what's happening so people don't know how to react. We're at a loss. Should I be hopeful or worried?" said Patra Michaelides, 45, a teacher.

Theodora Kyprianou 72, who owns a souvenir shop stacked high with unsold t-shirts, hats and souvenirs of Cyprus, said the general calm when the banks reopened did not surprise her.

"We're civilised here - what did people expect?" she said.

"The problem isn't big - it's very big. But what can we do about it?" she asked with a shrug.

There is also national pride at work. The president, Nicos Anastasiades praised his compatriots for their maturity and responsibility, while ordinary people said they had posted messages on Facebook urging Cypriots not to give the foreign media the satisfaction of seeing the country unravel.

"You may have the euros, but we have the culture," said the front page headline in the daily Politis, above photos of people queuing outside banks.

There have been street protests, but they have been limited in scope and certainly not violent.

"Cypriots are non-violent by nature. Just take a look at the vandalism and street protests in Greece. You have none of that here. This is a completely different mentality," said political scientist Hubert Faustmann of the University of Nicosia.

He said Cyprus was a small country, and if you took to the streets in protest, "you could be taking it out on your neighbour's brother in law".

"Also, there is a realisation that deep down, things were not perfect here," he said of a country whose overgrown banking sector was eight times the size of its economy.

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Comments (1)
dareconomics wrote:
This writers of this article rely on anecdotal evidence from man-on-the-street interviews in an attempt to explain why there was not bank run in Cyprus last week. The article is long on bromides extolling the nature of Cypriots but short on facts. Apparently, Cypriots are more civilized and peaceful than other protesting Europeans and inured to this crisis because of a civil war fought a generation ago.

Those are nice stories, but there are four reasons why there was not a run on Cypriot banks when they reopened on Thursday. The most important reason is that the €100k deposit insurance remained in place after the bailout. As long as the perception exists that small accounts are safe, there will not be a bank run among the people.

Additionally, a limit on withdrawal amounts has reduced the exigency of obtaining one’s money. The withdrawal limit has created a perception that the banks are not in danger of failing, because people may only take out a limited amount of money. These reasons are covered in the article but given short shrift over the stories from regular Cypriots.

These two reasons are not. First, the bank run already happened. Since Cyprus first began making noise about a bailout in June of 2011, there were decreases in deposits in 14 of 20 reported months, and the run picked up speed in January and February. Once the banks closed, connected customers were still able to withdraw funds and remove them from the country. No one knows how much money fled Cyprus in March, but it was a lot, enough to affect the proposed bailout. More money or another complete bailout for Cyprus will be necessary within a few months.

The second reason is that people are stupid. A bank deposit in Cyprus is now a loan to a very risky institution without the high interest rates necessary to pay for this risk. Under these terms, no one should keep money in a Cypriot institution. Cypriot mattresses do not pay interest either, but at least the government will not confiscate them.

The reason why a bank run did not occur Thursday is because it had already taken place, but a bank run is not even Cyprus’ biggest problem right now. It’s bank avoidance. Foreigners will no longer utilize Cypriot banks meaning that the island must quickly find a new industry that will replace 18% of its GDP if it is to avoid a depression and pay back the troika.

Full post with chart here:

http://dareconomics.wordpress.com/2013/04/01/bank-run-by-stealth-in-cyprus/

Apr 01, 2013 1:08pm EDT  --  Report as abuse
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