Money that's been trapped in Cyprus banks for the last two weeks could begin to cross the Atlantic and flood the American banking system starting Thursday when banks on the European island reopen, one banking expert predicts.
Investors, concerned by the banking shutdown in Cyprus since March 16 and the government's eventual decision to freeze the funds of large depositors, may be tempted to take their money and run to seemingly safer American banks. Wary of such a bank run, Cyprus officials plan to cap how much money consumers can withdraw from their savings and checking accounts and limit foreign credit card transactions over the next week to prevent a panic.
In the long run, however, Cyprus is setting the stage for Europeans to flee eurozone banks in favor of their counterparts in the U.S., says Dick Bove, a banking analyst at Rafferty Capital Markets.
"It's a gift to the United States banks," Mr. Bove said. "The fact that they've done this leads to the question of whether other banks in Europe will do it. Where is the money going to go that's coming out of Cyprus and Spain and Greece? It's going to go to banks in the United States. They're going to put their money in the U.S. Those countries cannot get that money back."
The troubles in Cyprus will become clearer Thursday when banks there reopen. During the past week, the country's struggles have halted what was one of the biggest period of gains on Wall Street in the past two decades. The Dow Jones industrial average closed Wednesday down at 14,526.16, while the S&P closed down at 1,562.85.
On Monday, Cyprus negotiated a $13 billion rescue package from the European Union, International Monetary Fund and European Central Bank — three financial bulwarks known as the Troika.
But it came with a steep price. Cyprus will be required to restructure its largest financial institution — the Bank of Cyprus — and dismantle its second-largest lender, Cyprus Popular Bank, or Laiki, which could cost the island thousands of jobs. Even more controversial, the nation agreed to freeze funds from large depositors in excess of $130,000 and commandeer that money to get the banking system back on its feet. It could generate about $5.3 billion for banks, but investors would lose as much as 40 percent of their deposits in the bank — an unprecedented move that has investors all across Europe fearing it could happen to them.
Despite the high-profile struggles of the American banking system in recent years, Mr. Bove is confident that the U.S. lawmakers would never take similar measures to solve such a crisis. "You really think they'd do that in the United States?" he asked. "What kind of crazy politician is going to do that to the United States?"
The Cyprus banking system, which was responsible for a total of $86 billion in deposits, held $48 billion in large accounts in excess of $130,000 that will be affected by the bailout package.
"This is not a negative event for U.S. banks," Mr. Bove emphasized. "There are billions of dollars that will be on the move. The American banks with an international presence in Cyprus will benefit the most."
In Cyprus, deposits were insured only up to $130,000.
Small depositors, with less than $130,000 in the bank, will not lose any money. All customers will only be able to access about $383 each day for at least the next week and will be barred from electronically transferring money overseas.
Credit card use is unaffected within Cyprus, but will be limited to $6,300 per month outside of the island. Travelers will be allowed to leave Cyprus with no more cash than $3,800, as opposed to the usual $12,700.
Cyprus central bank governor Panicos Demetriades referred to these as "loose" capital controls, while Finance Minister Michael Sarris they are "within the realms of reason."
"We will look at the best way to limit the possibility of large sums of money leaving, and not imposing punitive conditions on the economy, businesses and individuals," Mr. Sarris said in an interview with a local television station.
Mr. Bove said capital controls are not uncommon under such dire circumstances.
"Capital controls are not unique," he said. "The U.S. had it after World War II. Many countries have had capital controls, many banks have had capital controls."
"The reason why Cyprus is important is because they've attacked depositors, they've also attacked lenders and bondholders — generally speaking, you shouldn't cut off sources of funds for a bank."
The news has sparked protests in Cyprus with some 3,000 high school students gathering outside of the parliament. About 200 bank employees also protested outside the central bank.
The Federal Deposit Insurance Corp., which insures deposits in U.S. banks, declined to comment.
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