© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
March 26, 2013 6:33 pm
On Monday, EU officials pronounced Cyprus saved after the country agreed terms with international lenders on a €10bn bailout. On Tuesday morning, Elena Antoniou, a Cypriot interior designer, fired her staff.
“I told them, ‘Guys, three months of part-time and then we’re closing’,” Ms Antoniou recalled. Her firm had been working on a 3,000 sq m project at the insurance arm of Laiki, the country’s second-largest bank. But, as a condition of the bailout, Laiki is now in liquidation.
Ms Antoniou’s contractor on the project was a Laiki customer. With his accounts at the bank frozen, he has let go of all but six of his 25 staff. “He called me this morning and said, ‘I’m terrified. I’m ruined’,” she said.
The epicentre of the Cypriot crisis was the offshore financial business that inflated its banking system to about eight times the size of its economy – much of that with deposits from wealthy Russians.
But as that economic model crumbles, the damage is spreading in all directions, hitting businesses only loosely related to the high-flying offshore sector. Some analysts predict the economy will contract 10 per cent or more this year.
The experience of Ms Antoniou, and of her family and business associates, shows how quickly the pain has spread. The cement company run by her husband is facing tough times. Her son, who works at a local arm of a Greek bank, is worried about his future.
“The whole point of the bailout was to shrink the banking sector, but they’ve destroyed our entire economy,” she said. “The thing that’s scary is the confusion – nobody knows anything.”
The most immediate problem confronting businesses was a scarcity of cash. As of Tuesday, banks had been closed for 11 days and were not expected to reopen until Thursday.
“The problem is that that market is operating on a cash basis – everybody wants cash – but how can you create cash without banks?” said Iacovos Iacovou, chairman of Iacovou Brothers Group, the construction company that built the international airport.
Mr Iacovou said he was seeing a shortage of building materials because suppliers were demanding cash. “If the banks do not open in two days, we will have a problem,” he said.
One Cypriot businessman said the situation was so severe because every company he dealt with had accounts at either Laiki or Bank of Cyprus or both. The former is being split up and wound down, with accounts over €100,000 frozen. The latter is being restructured.
Piraeus said the €524m transaction – which will see it take on 312 branches from Bank of Cyprus, Laiki and Hellenic Bank – would give it a market share of more than 27 per cent of both Greek loans and deposits. It overtakes Alpha Bank to become the number two to National Bank of Greece.
The deal, which had been factored into the broader €10bn bail-out programme for Cyprus announced on Monday, will lead to what one senior banker called a “very serious and drastic restructuring” of Piraeus. The bank expects to close as much as half of the 1,600-plus branches it will have following the deal.
Piraeus is already midway through integrating other acquisitions, including the “good” part of state-owned ATE and former Société Générale subsidiary Geniki.
The Greek branches of the Cyprus banks, which were closed all last week as negotiations dragged on over the Cypriot bailout, will reopen on Wednesday, Piraeus promised.
The deal is being funded by the Hellenic Financial Stability Fund – the EU-backed Greek bail-out fund – but Piraeus is understood to be set to make a net capital gain on the transaction of about €1.5bn, bolstering its capital position.
The group’s funding position is slightly improved, too, with its ratio of loans to deposits falling from 125 per cent to 120 per cent as a result of the transaction.
As a result, uncertainty has spread to every corner of the commercial world.
“It’s a nightmare,” the businessman said. “If companies lose their existing overdraft facilities the logistics will be very difficult.”
Even before the trauma of the last week, the Cypriot economy had been strained by recession and slow growth, due in part to its exposure to Greece. Because of that many employers had been downsizing, including Yiannis Papadopoulos, the owner of Politis, Cyprus’ second-largest newspaper.
Mr Papadopoulos had budgeted for a 30 per cent fall this year in advertising, the paper’s main source of revenue. But he guessed advertising had dropped 70 per cent in past two weeks. Motor advertisements have disappeared entirely.
The only new arrivals were foreign exchange companies, such as MoneyGram, which Cypriots might soon use to send their savings out of the country or to receive money from relatives living abroad.
Mr Papadopoulos was devising a plan to make partial payment to his 50 employees on Friday after many of Politis’ advertisers failed to settle bills with their agencies, and kiosks stopped reimbursing the paper’s distributor.
“It’s just total paralysis of the system,” he said. “If this goes on for another month, there will be nothing left.”
As the extent of the economic damage was becoming clear, there were scattered protests in Nicosia, the largest in front of the central bank, but no sign of unrest.
Yet even as businesses focused on short-term concerns, such as ensuring their employees are paid, attitudes appeared to be hardening towards the euro.
Cypriot entrepreneurs and industrialists are coming to terms with a tough future inside the single currency. Many express doubts about their ability to coexist in the currency union with northern member states, such as Germany and the Netherlands, that have demanded austerity in exchange for underwriting bailouts.
“We think differently…We could never become Germans,” Ms Antoniou said. “Probably this thing never should have existed.”
Mr Papadopoulos lamented the fact that, bound to the euro, Cyprus did not have the option to print money and devalue the currency to readjust its economy.
“We cannot be Germans,” he said, echoing Ms Antoniou. “Personally, I think we should take the money and then in five years – or as soon as we can – we should get the hell out.”
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in