By Menelaos Hadjicostis
NICOSIA, Cyprus -- Big depositors at Cyprus' largest bank may be forced to accept losses of up to 60%, far more than initially estimated under the European rescue package to save the country from bankruptcy, officials said Saturday.
Deposits of more than 100,000 euros ($128,000) at the Bank of Cyprus will lose 37.5% in money that will be converted into bank shares, according to a central bank statement. In a second raid on these accounts, depositors also could lose up to 22.5% more, depending on what experts determine is needed to prop up the bank's reserves. The experts will have 90 days to figure that out.
The remaining 40% of big deposits at the Bank of Cyprus will be "temporarily frozen for liquidity reasons," but continue to accrue existing levels of interest plus another 10%, the central bank said.The savings converted to bank shares would theoretically allow depositors to eventually recover their losses. But the shares now hold little value and it's uncertain when -- if ever -- the shares will regain a value equal to the depositors' losses. Emergency laws passed last week empower Cypriot authorities to take these actions. Cyprus' Finance Minister Michalis Sarris said the measures were taken to put the Bank of Cyprus on a solid footing. "We suffered a serious blow without doubt ... but we now have a bank which is reformed and ready to assume its role in the Cypriot economy," the state-run Cyprus News Agency quoting him as saying. Analysts said Saturday that imposing bigger losses on Bank of Cyprus customers could further squeeze already crippled businesses as Cyprus tries to rebuild its banking sector in exchange for the international rescue package. Sofronis Clerides, an economics professor at the University of Cyprus, said: "Most of the damage will be done to businesses which had their money in the bank" to pay suppliers and employees. "There's quite a difference between a 30 percent loss and a 60% loss." With businesses shrinking, Cyprus could be dragged down into an even deeper recession, he said.