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Officials scramble to stabilize Cyprus

Work to right banks ahead of deadline

College students protested in Nicosia Tuesday against terms of the bailout for the financially crippled island of Cyprus.

Patrick Baz/AFP/Getty Images

College students protested in Nicosia Tuesday against terms of the bailout for the financially crippled island of Cyprus.

NICOSIA, Cyprus — With time running out until Cyprus’s devastated banks must reopen their doors to the public, Cypriot and European officials are scrambling to put in place a set of measures that would allow jittery depositors access to their savings while preventing many billions of euros from fleeing the country.

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.

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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 $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 approximately $18 billion 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 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 $5.14 billion of deposits will be put in a bad bank and are most likely to be wiped out as the bank is wound down.

Debt specialists 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.

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 long-term deposits belong to foreigners 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.

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