Cypriots can be a spirited, passionate bunch but if you lobbed on to their sun-drenched Mediterranean island home right now you’re likely to see and hear those passions running higher and louder than usual.

They’re variously shocked, outraged, in denial or mired in despair.

The reason? They put their hard earned money into the bank and a bigger bank took it.

It’s an extraordinary transaction, sending shockwaves through other nations wrestling with epic debt and being forced into deals with the European Union to stay afloat. If this kind of thing could happen in Cyprus then surely it could happen anywhere “rescue” deals are being done.

ABC Economics specialist Stephen Long joins Foreign Correspondent to explore the profound implications of one of the most destabilising, destructive deals done in the course of the European Financial Crisis. Long travels across the island nation and meets people trapped by a national crisis that everyone agrees guarantees, not just recession, but depression. Businesses are closing, the construction industry is frozen and sackings have begun. Unemployment, currently 15%, is predicted to surge to more than 30%. Wages are being cut by as much as quarter.

So why is Cyprus, a rocky island nation of 800,000 people suffering such extreme financial pain – much worse than any of its fellow heavily indebted European nations – Greece, Ireland, Portugal and Spain?

The man who signed the deal - Cyprus’s  former Finance Minister Michael Sarris – says it was out and out bullying by The Troika – the European Union, the European Central Bank and the International Monetary Fund.

“We had a gun on our forehead, being told (by The Troika) we are going to pull the trigger. If you do not accept an arrangement like this then you have to accept the complete ruin of your economy, “ recalls Sarris who resigned soon after the agreement.

“They’d let the banks fail, smash the economy, unless you accepted the haircut?” asked Long.

“Absolutely, yes,“ declared Sarris.

It is not only Cypriots who are suffering. Tens of thousands of foreigners, Russians, Britons and other Europeans have been lured to Cyprus during recent decades. Sunshine, low taxation, relatively cheap real estate and a British-style legal system were all incentives to relocate from chilly northern climes.

Real estate agent Izabella Vinogradova says many wealthy Russians brought their money to Cyprus because they’d had bad experiences with Russian bank failures. But the seizure of their bank deposits has smashed the faith of her clients in Cyprus. The price of mansions on the rocky heights above the port city of Limassol has crashed.

“For Russians the matter of trust is the most important thing. They will move money from Cyprus but they don’t know where. They no longer have trust in Cyprus.“ IZABELLA VINOGRADOVA Real Estate Agent

Cypriots though have no choice but to have faith in themselves to endure the pain and to recover. They’ve done it before, they say, almost universally citing the events of 1974 when the northern third of the island was seized by the Turkish military, causing a huge number of Greek Cypriots to seek refuge in the south.

Can they survive The Haircut?

Cyprus general views. Leisure shots/Musicians

Music

00:00

LONG: On a sunny day it still looks like paradise. The Mediterranean glistens, the cafes are busy and the band plays on.

00:11

Music

00:22

LONG:  On days like this, you could almost forget the unfolding catastrophe. Cyprus is broke.

00:27

Bank exteriors

The banks are failing. Incredibly, for the first time in the global financial crisis, bank accounts are being raided. People’s savings are being seized. Not a bail-out but a bail-in with bank customers bearing the burden.

00:34

Driving around Cyprus

You can drive around this rocky island in a day, a predominantly Greek-speaking country on the doorstep of the Middle East – population less than a million. We’ve come here as Cypriots absorb the shock of what’s happened.

00:56

Souvlaki Bar

In the evening at this Souvlaki Bar in the capital, Nicosia, we get a sense of the mood.

01:15

YIOULA DEMETRIOU: “The financial crisis is making me very sad. Sad because I’m watching people suffer,

01:25

Yioula in Souvlaki Bar

people that haven’t done any mistakes, people who have worked hard for years, for their whole lifetime

01:31

Yioula

to save some money and then overnight they lose it. This is not fair”.

01:39

Yioula in Souvlaki Bar

LONG: Yioula Demetriou is the matriarch of this family business. She’s going to have 80 thousand Euros taken from her savings – about a hundred thousand dollars. Harsh treatment the European powers have demanded nowhere else in return for financial aid.

01:48

YIOULA DEMETRIOU: “We feel we are being used as a guinea pig here. They want to see, Europe wants to see if this will work and then they can do it in another place.

02:09

Yioula. Super:
Yioula Demetriou
Restaurateur

I have friends in France, in Italy, in Spain, in Greece and they are scared. They said this has happened once, it may happen again”.

02:19

General views

Music

02:30

LONG: In Cyprus, the confiscation of bank deposits is universally known

02:35

Zorpas Family Hair Salon

as “the haircut”. That’s right, “the haircut”. Really. The phrase conjures up visions of a trip to the barber.

[at the barber] “I don’t want

02:39

Stephen in barber’s

the Bank of Laiki cut where you lose the lot, okay? Just a tiny haircut”.

02:48

Music

02:53

LONG:  Haircut is all too benign a way to describe what’s happening. In return for 10 billion Euros of financial assistance, the European Union, the European Central Bank and the International Monetary Fund have applied a cut-throat razor.

03:00

This grouping’s known as the Troika and the cuts it has imposed will devastate Cyprus and undermine confidence in banking Europe-wide.

03:22

Music

03:32

Stephen outside banks to camera

“They call it a haircut but it’s more of a scalping really. If you had your money in Laiki Bank here, deposits over a hundred thousand Euro are going to be wiped out. You might get back a few cents when the bank’s assets are liquidated. You’re a little bit luckier if you had your money over here in the Bank of Cyprus. There, deposits over a hundred thousand well you lose forty to sixty per cent, transferred into shares in the troubled bank. But the final figure of what the loss will be isn’t known. It won’t be known for months”.

03:39

Bakery

The pain is already being felt at this family bakery near Larnaca on the southern coast of Cyprus.

04:11

“How much money did the family have in the banks here?”

04:21

Sotiroula. Super:
Sotiroula Georgiou

SOTIROULA GEORGIOU: “The family had... and the company, around two million Euro”.

LONG: “Two million Euro?”

SOTIROULA GEORGIOU: “Yes”.

LONG: “Who was that with?

SOTIROULA GEORGIOU: “With Laiki Bank”.

LONG: “Laiki Bank, the bank that’s gone to the wall basically”.

SOTIROULA GEORGIOU: “Yes, unfortunately yes and we can’t get anything from our accounts, everything is blocked”.

04:24

Bakery

LONG: Two million Euros is about two and a half million dollars. They’ll lose nearly all of it. This family business is one of thousands in Cyprus struggling to survive with its capital commandeered. It employs more than 60 people at five bake houses like this one and their jobs could disappear.

04:42

The owner, Telemachos Georgiou had plans to expand until he woke up one morning and found the money was gone.

TELEMACHOS GEORGIOU: “They cut off our legs above the knees.

05:10

Telemachos with Stephen in bakery

They are like predatory birds – wild animals that need flesh to feed themselves. They even eat our bones! How can we survive? How can I survive? I have 65 people working for me – what should I tell them tomorrow? I am closing down – leave!”.

LONG: He can’t pay wages, he can’t pay suppliers.

05:23

Sotiroula

SOTIROULA GEORGIOU: “I think it’s a robbery. I don’t know how to say this, if it is this. It is a robbery. They came in our house and they steal everything and we have nothing and we don’t know what we are going to do”.

05:42

Yellow flowers in field. Site of future bakery.

05:55

LONG: This was the field of dreams. Land that Telemachos Georgiou bought with plans to build a big modern bakery. He was going to hire about 30 more people. Now he’s laying staff off.

06:01

Telemachos with Stephen

TELEMACHOS GEORGIOU: “When we were young, we used to pick this flower which in Cypriot language we call Lazurus, because of the yellow colour – and we’d say, about the young girl with whom we were in love, ‘She loves me, she loves me not’. Now this has changed and I’m saying, ‘I will survive, I will not survive’. And it’s not dependent on me”.

06:20

Bakery

LONG: The tragedy is that only days before their money was lost, the Georgiou family tried to take it out of Laiki Bank then changed their mind after false assurances.

06:37

Telemachos with Stephen at table showing letter

Telemachos shows me a letter from the Central Bank of Cyprus. It was issued less than four weeks before deposits were confiscated. The letter says any action to cut deposits would breach the Cypriot Constitution and the European Convention on Human Rights.

SOTIROULA GEORGIOU: “We just heard rumours from everybody and

06:55

Sotiroula

when we went to the bank, okay, they confirm and they give us the letter from the Central Bank that everything will be okay and nothing is going to happen. So we left our money in the bank there and everything now is blocked”.

07:20

People at banks/ People on street

LONG: It’s not just large deposits that are affected. Everyone’s cash is trapped in the banks by capital controls designed to stop a bank run. People can only take out small sums of money.

07:37

General views. Cyprus

Music

07:52

LONG:  So how did Cyprus get into such a mess? Well, it’s what happens when the bankers take over from the goat herders.

07:57

Goats/ Developments

From a country based on farming and tourism, Cyprus transformed into a financial services powerhouse. Developers sucked up easy credit as offshore money flooded in, attracted by low tax rates and relaxed rules on foreign investment. Living standards soared.

08:08

Sarris. Super:
Michael Sarris
Former Finance Minister

MICHAEL SARRIS: “We were financing consumption beyond our means. That money also found its way into banks and in real estate. In real estate it caused a bubble, with real estate prices throughout Cyprus but especially in Limassol really going through the sky”.

0833

Limassol

LONG: Limassol. Port town. Tourist Mecca. With a strip behind the beach full of clubs and karaoke – Russian karaoke.

08:55

Woman singing in karaoke bar

[Singing]

09:09

LONG:  The town’s been dubbed “Limassolgrad” – home to the Russian community in Cyprus.

09:15

[Singing]

09:20

Karaoke bars

LONG: There are thirty thousand Russians living here, just a three hour flight from Moscow. An investigation’s underway to see if Cypriot banks laundered money for Russian oligarchs and criminals, but among the Russians in Limassol are ordinary people who fled corruption at home.

09:26

Stephen visits Izabella. Walking around pool

[Singing]

09:44

LONG:  Izabella Vinogradova is part of the Russian diaspora.

IZABELLA VINOGRADOVA: “In any case, it’s a very nice location. The position is perfect”.

LONG: “Yeah you can see why Russians would want to move here compared to living in Moscow”.

IZABELLA VINOGRADOVA: “Yes”.

LONG: She makes a living selling real estate here to Russians.

IZABELLA VINOGRADOVA: “This view is what we miss very much in Russia. We don’t have it every day, we don’t have it at all. We don’t have the sun”.

09:59

Bank exteriors

LONG: Aside from the lifestyle, I asked her why so many Russians had set up shop in Cyprus.

10:22

IZABELLA VINOGRADOVA: “The banking system here and the system of offshore companies, because it’s very connected. Organised very well..

10:30

Izabella. Super:
Izabella Vinogradova
Real Estate Agent

They could do very fast deals. They can transfer money all around the world. Nobody was asking them where this money came from, why you’re sending them there - we have these regulations in Russia. Here it’s very easy. You come to Cyprus, you open account, you open your company and you start working in twenty four hours”

10:39

LONG: “On the day of the haircut, what happened to the property market?”

11:02

IZABELLA VINOGRADOVA: “Drop in prices from 15 to 20... 25 per cent in one day”.

LONG: “A crash, a one day crash”.

IZABELLA VINOGRADOVA: “In one day, yes”.

11:04

Izabella and Stephen look at Limassol houses

Music

11:14

LONG: Izabella took us on a Russian real estate tour in Limassol.

11:22

Izabella driving

IZABELLA VINOGRADOVA: “Many years ago there was an Armenian Village here but now we call it Roussos Villas. All Russians live there, all businessmen, rich people”.

11:27

LONG: Not quite so rich now.

11:37

Driving up to house

Music

11:40

IZABELLA VINOGRADOVA: “This is the house. We built this house three years ago and we sold it for 8 million”.

LONG: “8 million Euros?”

IZABELLA VINOGRADOVA: “Eight million Euros yes,

11:45

to a Russian person, a businessman,  and if I knock on the door now, if I ask him if he wants to sell it, he will sell it and I think the price would be four”.

11:54

Driving past finished housing developments

Music

12:06

LONG: Half-finished buildings stand as monuments to the downturn. Everywhere you see signs reading “for sale” and “to let” and as the bubble burst, the bankers got desperate and foolish.

12:10

Music

12:25

Stephen outside Laiki Bank to camera

LONG:  “The banks in Cyprus had a five billion Euro exposure to Greek government debt and what’s truly extraordinary is they got out of Greek debt,  then they piled back in after it became clear that Greece was broke. The bankers here were using the high interest payments on Greek Government bonds to cover their own loan losses. They were betting that Greek bond holders would only get a small haircut. That proved to be a disastrous miscalculation”.

12:31

Benefit concert in park

[Drumming]

12:58

LONG:  Just five years ago Cyprus had full employment - now they’re holding benefit concerts for the poor.

13:07

By evening, thousands gather in this park in Nicosia, beneath the ancient Venetian walls that once protected the city.

13:17

Band performing at concert

[Singing]

13:27

Food donations

LONG: They come bearing food, lots of it.

13:31

Georgia Polyviou is leading these volunteers. She says one hundred and fifty thousand people need help.

13:34

Band performing at concert

[Singing]

13:42

LONG:  “How many people are unemployed in Cyprus?”

13:48

Georgia. Super:
Georgia Polyviou
Aid worker

GEORGIA POLYVIOU: “Fifteen per cent at the moment but that number is going to rise, economists believe, to about thirty per cent within a few months with all these layoffs”.

13:51

Food donations

LONG: “A depression”.

GEORGIA POLYVIOU: “A depression, yes”.

LONG: “What’s the feeling towards the European Union, the International Monetary Fund and the European Central Bank here at the moment?”

GEORGIA POLYVIOU: “There is resentment, but of course

14:03

Georgia

we are to blame for a lot of it. We went to them for help. When they lend you money they put their terms. I think this will destroy our economy rather than help it. I hope I’m wrong but it seems like it will be a cycle of depression after depression, because as people lose their money, as companies and businesses lose their capital and can employ less people, it seems very difficult for recovery to occur”.

14:17

Tourists at cafés

Music

14:47

LONG: Summer’s coming. The tourists from northern Europe might keep things afloat for a little while but a depression is certain. Even the man who agreed to the haircut says so.

MICHAEL SARRIS: “We are a member of the European Union,

14:55

Sarris. Super:
Michael Sarris
Former Finance Minister

we have made our mistakes, but I don’t think we deserved this very harsh and cruel treatment”.

15:08

Stephen and Sarris walk

LONG: Michael Sarris has worn two hats in the crisis. For eight months last year he was chairman of Laiki Bank, installed by the government to try to sort out the mess. Then he was appointed finance minister and represented Cyprus in talks with the Troika. He’s resigned while the bank failures are investigated.

15:15

Sarris

MICHAEL SARRIS: “The Cypriots were the ones saying think very carefully what you are doing. You are not only hurting Cyprus, but you’re hurting the credibility of the Euro zone”.

15:39

LONG: “Why did the government of Cyprus accept the haircut?”

MICHAEL SARRIS: “We had a gun

15:48

on our forehead there being told we are going to pull the trigger. If you do not accept an arrangement like this then I think you have to look at the prospect of a complete ruin of your economy”.

LONG: “They’d let the banks fail, smash the economy, unless you accepted the haircut?”

MICHAEL SARRIS: “Absolutely, yes”.

15:52

Luis doing stand up comedy

LONG: It’s Friday night in Nicosia. At this comedy club, Luis Patsillides has been satirising the crisis for months. It’s an old gag, take a handbag from the audience and send up the contents, but with a Cypriot banking twist.

16:21

LUIS PATSILLIDES: “And there is a passbook! It’s unbelievable! It’s a Laiki passbook – a souvenir you know! She can put it in a frame. It says €4,811 dude. It’ll take her six months to extract this money from the bank!”

16:41

“We were afraid that our show will not last any more because of the crisis,

17:03

Luis. Super:
Luis Patsillides
Comedian

but it’s the opposite. Now we’re overbooked for a month and a half in front because people need to go out and laugh and get away from their problems”.

17:10

Luis at rally

LONG: And guess what the comedian does for a day job? Luis is one of thousands of bank employees whose jobs and retirement savings are under threat. He works for Laiki, though maybe not for much longer. We joined him as five thousand bank workers marched on the parliament.

17:20

LUIS PATSILLIDES: “One day you have a job and suddenly the next day in the morning you hear that Laiki Bank has collapsed and everything is different”.

LONG: All up, billions of dollars of superannuation were in the banks – Cypriot employees could now lose much of their retirement savings.

17:44

“How much money is in the provident fund, what we would call a superannuation fund?”

LUIS PATSILLIDES: “I know from my bank I think it’s two hundred and eighty million”.

18:03

LONG: “Two hundred and eighty million”.

LUIS PATSILLIDES: “Yeah only from the Laiki Bank employees”.

18:15

LONG: “And a lot of that was in Laiki Bank?”

LUIS PATSILLIDES: “All, all”.

18:19

Bank employee rally

18:22

LONG: In Cyprus, employers and employees jointly contribute to their super.

18:25

PROTEST CHANT: “Hands off our provident funds and our jobs!”

18:31

LONG: Social cohesion is unravelling as the impacts flow onto workers, the poor and the sick.

18:36

Cancer Patient association physio group

Many essential services here – including out of hospital care for cancer patients are provided by charities, not by government. The Association of Cancer Patients and Friends is one such charity. It’s going to lose nearly thirty per cent of its bank deposits above a hundred thousand Euros, and donations are drying up.

18:47

BARBARA PITSILLIDES: “We have no support from the government. We do fundraising every single month.

19:19

Barbara. Super:
Barbara Pitsillides
Nurse

We work from hand to mouth so the money we raise this month will offer the service next month. I’m furious. I’m angry that actually some people in a boardroom could have decided that they know what’s best for Cyprus. They haven’t even taken into account the human cost”.

19:25

Barbara driving

LONG: Barbara Pitsillides is a specialist palliative care nurse. She heads the cancer charity’s home care service.

19:50

BARBARA PITSILLIDES: “We look after about 1500 patients at any given time and we believe we change the quality of life of the patient so they have some dignity - during all the course of disease, from the time of diagnosis all the way through to the end of life”.

20:02

Barbara and Stephen visit Frini

LONG: Now the charity will have to cut wages, cut staff, cut the level of care. We’re visiting Frini Hadjilyra, a patient who’s had a radical mastectomy.

20:20

BARBARA PITSILLIDES: “Frini’s in a lot of pain and she refuses to take oral morphine to help her resolve her pain, so we put it actually topically on the wound to help her with her pain control”.

20:41

LONG: Every day a nurse has to come and change her dressings.

21:01

Frini’s husband is an Australian Cypriot.

21:19

Stephen talks with Frini

FRINI HADJILYRA: “My husband is from Three Sisters in the Blue Mountains -- Katoomba”.

LONG: “Oh it’s very lovely at Katoomba”.

FRINI HADJILYRA: “Oh it’s very nice”.

21:21

LONG: With unemployment soaring he couldn’t get a job in Cyprus, so now he’s back in Australia, working and sending money home.

21:33

“How did you feel when you heard about what was happening with the banks?”

FRINI HADJILYRA: “I said I don’t have a gun. If I had a gun I know how to treat a gun.... will use”.

LONG: “If you had a gun you would have used it?”

FRINI HADJILYRA: “Many times in my life I said if I was a man I would punch you. You are lucky that I’m a lady you know?”

LONG: “Who would you have been looking to punch?”

21:42

BARBARA PITSILLIDES: “I’m really afraid Steve that patients like Mrs Frini will die at home alone in pain without any medical support.

22:10

Barbara

It is a social crime. This is not just about an economic burden placed on Cyprus to save the Cypriot economy. It’s become a social crime that people will be in this day and age at home, alone, suffering in pain. It’s a human right to be offered pain medication”.

22:22

General views Nicosia

Music

22:47

LONG: Cyprus is a country divided. Nicosia is the last partitioned city in Europe – Greek Cypriot on one side, Turkish on the other. Almost forty years ago in 1974, Turkey seized northern Cyprus following a coup by the military junta then ruling Greece. The invasion still frames the psyche of Cypriots – the economic crisis is being spoken about in similar terms.

22:55

Sarris

MICHAEL SARRIS: “This I think, this is a catastrophe that is comparable to what had happened in 1974”.

23:31

Yioula at Souvlaki Bar. Greets Stephen

23:37

LONG: Yioula Demetriou has been caught up in both catastrophes. At the Souvlaki Bar, during one of our regular visits, she told me how her family had lost their land and wealth in northern Cyprus and had to start again. Yet still she’s relentlessly positive.

23:43

Yioula and Stephen raise their glasses

YIOULA DEMETRIOU: “Cheers to optimism”.

LONG: “Cheers. Here’s to a glass half full as we say.”

YIOULA DEMETRIOU: “Ah... I see it is half full, not half empty”.

LONG: “That’s right”.

Beneath the cheer there’s pride and anger.

24:02

Yioula. Super:
Yioula Demetriou
Restaurateur

YIOULA DEMETRIOU: “The Greeks and the Cypriots have given so much civilisation to Europe. Ten thousand years ago Cyprus had an alphabet, they had a language, they started talking about democracy. So we want more respect from the Europeans, from the northern Europeans. They lived in caves up to 200 BC”.

24:15

General views. Cyprus

Music

24:42

General views. Beach

LONG: Yioula’s enormous pride in this ancient country is shared across the generations. Yet already many of the best and brightest are fleeing the failing economy.

24:49

Stephen sits at table

All my years of training and experience as an economics journalist tell me the cruel experiment in Cyprus will not work. The consequences for ordinary people will be terrible.

25:06

Food donations

But Cypriots refuse to be cowed. You’ve got to admire their spirit.

YIOULA DEMETRIOU: The Cypriots are fighters. This is my message

25:19

Yioula

to the rest of the world: we are fighters and we have the strength and we have the heart and we will fight”.

25:31

Food donations in ute

Music

25:43

Credits:

Reporter: Stephen Long

Camera: David Martin

Research: Ralli Papageorgiou

Editor: Garth Thomas

Producer: Greg Wilesmith

25:50