This commentary is written by Tony Alexander, Chief Economist of the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. tony.alexander@bnz.co.nz www.tonyalexander.co.nz To receive Tony Alexander’s publications click here http://feedback.bnz.co.nz/forms/lFdYSs5FGEq4kAjP95uzTA
In August 2005 a Helios Airways airplane crashed killing 121 passengers plus air crew and leaving 33
orphans. Each orphan received about €1mn in compensation which carers mainly placed in bank accounts for when the children grew older. The Cyprus bailout means most of their money is now gone. Hotels in Cyprus during winter took large advance payments from foreign travel agencies for bulk bookings of rooms over the coming summer. The money they received has now all but been forfeited to the government but they are legally obliged still to provide the accommodation and food services the travel agencies purchased. Losses will be huge.
An amount equivalent to 60% of GDP has been taken from all business and individual depositors in the
two biggest banks in Cyprus accounting for over 60% of the banking system. All accounts bar a select few have lost all amounts above €100,000 at the now closed down Laiki Bank, and 60% of amounts over €100,000 at the larger Bank of Cyprus have gone. So if you had €500,000 on deposit at Laiki, or €50mn, you now have €100,000. Families have lost their life savings, potential home buyers have lost funds from their previous house sale, businesses have lost the funds they were going to use for expansion. How did this happen?
These money confiscations are the result of Cyprus’s €23bn bailout agreement reached with the Troika of the European Commission, European Central Bank and IMF on April 2 – the first time ever that depositors in a bank have been “bailed in” on a large scale. It is not something which was forced upon depositors in either of the two Greek bailouts or the Portugeuse or Irish bailouts. It has shattered Cypriot confidence in any concept of “solidarity” in the Eurozone, was made necessary by poor bank and central bank governance in Cyprus, and it is probably the model to be used for all future bailouts in Europe and other countries.
I was in Cyprus from the evening of Saturday 4 to the morning of Thursday 9 May, saw in Easter Sunday and celebration of the Rising of Christ after midnight on Saturday, and partook of the copious meat eating people engage in after 50 days of avoiding animal-based food products. I spent Sunday in the beautiful valley village of Palaichori which supplied about 90% of New Zealand’s Cypriot migrants, crossed briefly into the buffer zone in Nicosia between the Greek Cypriot part of Cyprus and the 37% of the country seized by Turkey in their 1974 invasion, and spoke with many senior government and business community figures. These included the former Finance Minister who negotiated the bailout deal with the Troika, senior representatives of the Ministry of Finance and Central Bank of Cyprus, people from the Cyprus Investment Promotion Agency, Union of Cyprus Municipalities, and the Cyprus Chamber of Commerce and Industry. All experiences and visits were wonderfully arranged by New Zealand’s Honorary Consul in Cyprus Tony Christodoulou who with his wife Mickey were excellent hosts. The weather was hot, the people friendly (90%
speak English), and if you are heading to Europe and want a relaxed hot weather holiday Cyprus is a great place to go with good food, great service, and wonderful beaches – though I did not have time to see any of them.
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