NICOSIA, Cyprus — Cyprus, a palm-fringed island in the Mediterranean Sea, has long held three distinctions: Its economy is the smallest in the European Union, its capital is the farthest from the EU’s administrative center in Brussels, and it’s the only EU country in a “frozen conflict,” with Turkish forces occupying the northern third of the country for nearly 40 years.
Now it has another: It’s the only place in the continuing euro currency crisis in which the government has agreed to force bank-account holders to help pay for the rescue of debt-ridden banks.
Under the deal, Cyprus’ Laiki Bank will close, and the Bank of Cyprus will absorb its accounts and the performing loans on its balance sheet. The losing investments in its portfolio will be paid off with $7.5 billion in funds skimmed from large accounts in the two banks.
But who actually will end up footing the bill isn’t known. Will it be Russian businesses and investors, who have some $32 billion — possibly even more — of the almost $88 billion in deposits held in Cypriot banks? Or will it be Greek Cypriot businessmen who’ve kept their working capital in the banks?
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One entity that expects to take a huge scalping is the Orthodox Church of Cyprus. Archbishop Chrysostomos II said Monday that he expected the church would lose more than $130 million in confiscated deposits.
Cypriots, who’ve survived 10 days with minimal access to cash as banks remain closed for fear of a run, are hoping that their businesses can survive. The government has said banks will open Thursday, though how much money anyone will be allowed is still uncertain.
Cyprus’ financial crisis was long expected, ever since Greece was forced to write down the value of its government bonds. At the end of 2011, the Bank of Cyprus had $14 billion tied up in Greek debt, while Laiki Bank had more than $24 billion, Reuters reported, quoting official EU statistics.
The banks invested in Greek bonds at a 25 percent discount, on the assumption that there would be a further rescue and they would be redeemed at face value. Instead, private-sector investors purchased the debt at a 50 percent discount, causing major losses for the two banks.
Nearly everyone has fumbled in this crisis, which came to a head shortly after the new Cypriot president, Nicos Anastasiades, a moderate, had taken office, replacing Demetris Christofias, a communist who had refused to resolve the debt crisis on terms demanded by the EU.
About the only major figure in Cyprus who came out in higher standing than when the crisis began is Archbishop Chrysostomos, who in an interview offered to put all the church’s wealth at the disposal of the nation — and urged the Cypriot government to abandon the euro.
Chrysostomos said the church in the past had had to sell candles and precious religious objects, “and yet it survived.”
The church, he said, “will stand close to the people, as the people stand close to the church.”