“During the current period of low to no growth in Europe, it is certainly possible that a run on Cypriot deposits could spread, in spite of existing or future controls on capital,” wrote Fergus McCormick, head of sovereign ratings at DBRS.
A total of 378 billion euros was pulled from banks in Ireland, Spain, Portugal, Greece and Italy in the 13 months through August, according to data compiled by Bloomberg. The flight was reversed only after the ECB pledged to buy government bonds of those countries, calming investors.
Cyprus’s three biggest publicly traded banks had a total of 6.5 billion euros of losses in 2011 after writing down the value of their Greek bond holdings. They have also been bleeding on their loans to companies and individuals in Greece, which is in its fifth year of a contracting economy.
At least 1,600 Greek shipping, trade and tourism companies headquartered in Cyprus are threatened with closure, according to National Confederation of Hellenic Commerce. Greek firms that held deposits in Cyprus were unable to meet a deadline this week for paying taxes in Greece, the Athens-based organization said.
The divided island’s internationally recognized southern part is ethnically Greek and has close ties to the financially troubled country. The northern part is controlled by a breakaway government backed by Turkey.
Russian companies with banking ties to Cyprus will face the same hurdles as their Greek counterparts, though the impact on the Russian economy will be less significant. Russian economic output, which expanded by about 4% last year, is almost 10 times as much as Greece’s.
The biggest losers may be Cypriots themselves. Unemployment could double to 30% as a result of the planned bank restructurings, estimates Hari Tsoukas, a professor at Warwick Business School in Coventry, England.
“Life will be difficult for people living in Cyprus,” Tsoukas said. “The country will be another version of Ireland and Greece, with a tough austerity program. In another decade, we can look forward to another recovery.”