BRUSSELS/NICOSIA: As new President Nicos Anastasiades hesitated over an EU bailout that has wrecked Cyprus's offshore financial haven status, money was oozing out of his country's closed banks.
In banknotes at cash machines and exceptional transfers for "humanitarian supplies", large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.
EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. "The amount the Cypriots mentioned... on a daily basis was much less than it was in reality," the source said.
Confusion over just how much money was pulled out of Cyprus' banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 per cent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc's debt crisis. Cyprus' problems began in Greece - it is heavily exposed to the euro zone's first bailout casualty.
No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals.
Bank of Cyprus also owns 80 per cent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.
While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.
Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.
Chris Pavlou, who was vice chairman of Laiki until Friday, said while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions.
German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.
BIG DEPOSITORS BURNED
Big depositors, including wealthy Russians and Britons, whom the Cypriot president had sought to shield from a levy of any more than 10 per cent on their holdings, will end up being far more severely burned - if their money is still there.
Under a bailout deal sealed early on Monday morning in snowy Brussels, Cyprus will have to shut its second largest bank and inflict heavy losses on large account holders the two biggest.
Deposits over 100,000 euros in both will be frozen and used to resolve the debts of the defunct Laiki and recapitalise Bank of Cyprus. Both banks were hurt by their exposure to Greek sovereign debt when bondholders were forced to take writedowns last year.
By Sunday, one participant in the negotiations said, there was almost no capital left in Laiki, a bank whose market value peaked at 8.1 billion euros in November 2007. Laiki's former vice chairman Pavlou disagreed, estimating there had been 2.5 billion euros in foreign deposits alone.
No figure was announced for the scale of the "haircut" on big depositors, but it will be nearer to 50 per cent than to the 15 per cent that Anastasiades rejected on March 15, participants in the negotiations said, speaking on condition of anonymity.
To enable him to negotiate with politicians of his own protocol rank, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso conducted the talks with Anastasiades, elected last month.
At one point on Sunday afternoon, the conservative president threatened to resign in an emotional exchange with the heads of the EU institutions and the International Monetary Fund.
The troika of lenders called his bluff, saying that if he quit they would continue negotiations with the speaker of the Cypriot parliament, next in line constitutionally, a participant in the talks said. Anastasiades stayed.
For months, bailout talks with his Soviet-educated Communist predecessor, Demetris Christofias, had gone nowhere due to his refusal to privatise state assets. "Christofias didn't want to be the president who had signed a bailout with the troika," an EU official said.
The cost of a rescue kept on mounting. By the time the new leader was ready to do a deal, the IMF and Germany were demanding a 40 per cent across-the-board bail-in of creditors and depositors in the two main banks.
German Finance Minister Wolfgang Schaeuble said Berlin had achieved exactly what it sought in exchange for the 10 billion euro financial rescue - that creditors and uninsured depositors in the two biggest Cypriot banks should share the load.
"This is bitter for Cyprus but we now have the result that the (German) government always stood out for," he said.
An EU source said the IMF and Germany had initially wanted to go further and wind down both Laiki and Bank of Cyprus.
European politicians, anxious to deflect criticism for having been party to an initial deal 10 days ago that would have imposed a levy on all small savers in Cyprus, rushed to say that Nicosia had only itself to blame.
"To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy," French Finance Minister Pierre Moscovici said.
He said he had always opposed taxing deposits smaller than 100,000 euros, which are subject to an EU guarantee. Yet neither he nor other ministers or European Commission officials spoke out against the idea at the March 15 meeting, participants said.
Only when a firestorm of protest erupted in Cyprus and it became clear the Cypriot parliament would not endorse the plan did they belated call for accounts under the 100,000 euro threshold to be left untouched.
