The euro area’s first restrictions on the movement of capital are doing more damage to Cyprus’s economy than a one-time levy on savings and must be lifted as soon as possible, the island’s Commerce, Tourism and Industry Minister George Lakkotrypis said.
“We are now at a point where capital controls are hurting more than the haircut itself,” Lakkotrypis said in a June 17 interview in Nicosia. “Small and medium-sized enterprises are closing one after the other and the longer we have controls, the longer we’ll have uncertainty.”
Cyprus agreed on March 25 to a 10 billion-euro ($13.4 billion) loan from the euro area and the International Monetary Fund in return for measures including a levy on savings of more than 100,000 euros at Bank of Cyprus Plc and the resolution of second-biggest lender Cyprus Popular Bank Pcl. Those concessions were demanded by creditors in a bid to shrink the country’s banking industry and led to Cyprus imposing the first capital controls in the euro area.
Limits to cash withdrawals and transfer of funds abroad are some of the restrictions in force since March 27 when Cyprus’s government imposed the restrictions to prevent savers from moving their funds out of the country’s banks. Banks reopened on March 28 under the regime after a bank closure of almost two weeks.
Capital controls need to end so Cyprus can start “gaining back our credibility in the outside world while the recapitalization of Bank of Cyprus must be completed as soon as possible,” Lakkotrypis said.
Total deposits in Cyprus’s banking system dropped 9.9 percent in April to 57.4 billion euros from 63.7 billion euros in March reflecting the “bail-in” of Bank of Cyprus depositors with savings of more than 100,000 euros, the Central Bank of Cyprus said May 29. Of those accounts, 37.5 percent were converted into equity while a further 22.5 percent are temporarily blocked to ensure Bank of Cyprus meets the terms of its recapitalization.
While Cyprus has lost its banking sector and credibility, the country hasn’t seen a mass exit of foreign firms as it’s still an attractive place to do business, Lakkotrypis said.
“Many foreign investors are telling us: what’s done is done, there’s a haircut, we need to get it over and finished so we can see what we have and carry on operating,” he said.
Cyprus will depend “heavily” over the next two to three years on tourism for its economy to return to growth, Lakkotrypis said. The plan to open casinos as well as new marinas and golf courses will help make Cyprus a year-round tourism destination and will boost tourism numbers, he said.
Lakkotrypis said that while Cyprus has struggled due to its banking crisis, he said the government was keen to send the message to tourists that “there is no problem with banking transactions, credit cards and cheques are accepted”.
“While reservations to date for 2013 are seven percent lower than a year ago, given the situation following the loan deal, we are optimistic we can bounce back and close the gap if we send the right messages to the outside world,” he said. “We’ve no problem with rioting in the streets.”
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