Financial industry insiders on Monday downplayed the potential fallout on Cyprus from the cash crisis in Lebanon, after the neighbouring country defaulted on its debt for the first time in its history.
Lebanon withheld payment on a $1.2 billion (€1.05bn) maturing Eurobond, with Beirut announcing plans to restructure public debt. The country’s banking system is in the throes of a cash crunch, its foreign reserves running dangerously low.
Lebanon’s total debt exceeds $90bn and amounts to 170 per cent of the country’s GDP.
Monday’s default could further hurt the country’s already strapped commercial banks.
In Cyprus, there operate branches of about 10 banks which are either directly Lebanese-owned or in which Lebanese investors have a considerable stake.
In a hypothetical Lebanese meltdown, the Cyprus government would be obliged by law to compensate depositors in these banks up to the €100,000 limit.
Figures on Lebanese-linked guaranteed deposits in Cyprus could not be obtained, although industry chatter estimated them at more than €200m.
Asked to comment, sources in the financial industry told the Cyprus Mail: “The situation appears to be manageable.”
Finance Minister Constantinos Petrides said only that the law governing guaranteed deposits was recently amended with additional safeguards.
Just on February 28 this year, parliament passed the 2019 (amended) Deposit Guarantee and Resolution of Credit and Other Institutions Law.
Although the Lebanese situation was likely not the main driver behind the bill – introduced by the government – one of its clauses provides for “the payment of compensation, in the event of the Deposit Guarantee Scheme being activated, from the cash holdings of the banking institution, under certain conditions.”
It’s understood this means the Central Bank of Cyprus will from now on require commercial banks – including branches of foreign banks here – to increase their cash reserves with it.
Speaking on condition of anonymity, an MP with the House finance committee told the Cyprus Mail that the central bank’s move was odd, given that since at least around last November capital controls have been placed on Lebanese nationals with accounts in Lebanese banks in Cyprus – they cannot access cash from other accounts in Lebanon.
Informal capital controls imposed by lenders in Lebanon since mid-October, intended to stop a run on the banks, mean depositors are able to withdraw as little as $200 every two weeks in some cases, and cannot transfer their funds abroad.