March 28, 2013

NICOSIA, Cyprus — Shaking his head in disgust, Stavros Agrotis, an independent financial executive here, peered Thursday morning at the stock chart of Bank of Cyprus on his computer screen — a bright red line sloping sharply downward, before it stopped trading altogether in recent days.

“The screen says 20 cents, but according to the troika it’s zero,” he said angrily. He was referring to the three international lenders — the European Commission, the European Central Bank and the International Monetary Fund — that had devised the tough new program that requires shareholders, bondholders and depositors to share with European taxpayers the cost of bailing out Cyprus’s two biggest banks and preventing the government from going bankrupt.

“We were a member of the European family,” he continued. “Now it seems they want to push us out of the euro.”

For 20 years, Mr. Agrotis was a stockbroker at Bank of Cyprus, the country’s largest financial institution, and until the shares were recently wiped out, he and his family had much of their wealth tied up in the bank via shares, bonds, retirement funds and — now — frozen deposits. Under terms of the bailout, shareholders’ equity in the bank has been eliminated.

But while Mr. Agrotis and his compatriots may be feeling enormous pain, the broader reaction by investors in Europe and beyond was more or less muted on Thursday, as it has generally been since the Cypriot bailout negotiations burst into chaotic public view the weekend before last. For the broader world of finance, the prevailing view — for now, at least — seems to be that the implosion of this tiny island economy of 20 billion euros ($25.6 billion) need not wreak broader market havoc.

Within Cyprus, though, as the realization sinks in of how badly the national economy might be ravaged by the combination of capital controls on the flow of money out of the country and an indefinite freeze on the bulk of bank deposits, frustration is flaming into full rage. Some establishment figures are now openly discussing the option of leaving the euro currency union and defaulting on the country’s loans.

“Two weeks ago exiting the euro was never mentioned; now it is being widely discussed and a lot of people are considering it,” said Nicholas Papadopoulos, the chairman of the Cypriot Parliament’s finance committee, whom many here see as a future candidate for the presidency. “Europe has destroyed our banking system; now we need to consider all our options.”

Like Mr. Papadopoulos, Mr. Agrotis, who is 56, is no one’s version of an extremist. He is a solid member of Cyprus’s financial establishment, and his ancestors were founders of Cyprus’s most venerable financial institutions.

So convinced was he, even in recent weeks, that Bank of Cyprus was too big to fail that Mr. Agrotis even increased his stake, buying additional shares as the stock hit new low after new low.

Now, like just about everyone on this shellshocked island, he is groping for answers.

Turning from the carnage on his computer screen, Mr. Agrotis took off his glasses and rubbed at eyes bloodshot from the many sleepless nights he had spent poring over economic papers, analysts’ reports and political histories. It was all part of a fruitless search for a theory or precedent that might explain the terrible predicament that had fallen upon him and his countrymen.

On a computer screen, the downward fever chart is the symbol of loss in the world of money, equally understood by the day trader in his living room or the globe-trotting hedge fund investor.

But for Mr. Agrotis and many others in this tiny country of fewer than a million people, Bank of Cyprus’s plunging chart line means much more than the mere evisceration of a lifetime’s savings.

“There is an arrogance in the behavior of Europe’s leaders that reminds me of the behavior that started two world wars,” said Mr. Agrotis, pointing out that World War I began as a dispute among Russia, Germany and Britain over a tiny sliver of the Balkans. “The next war starts here in little Cyprus.”

Hyperbole, probably. But Cypriots are staring into an abyss. They see having about 10 billion euros in the country’s financial assets — more than half the size of Cyprus’s annual gross domestic product — frozen indefinitely as nothing less than an apocalyptical event. Add to that the immediate pain suffered from a deposit haircut that may exceed 40 percent on any balances of more than 100,000 euros and the loss, probably forever, of billions of dollars of savings at Laiki, the country’s second-largest bank, which has been shut down.

For all Cypriots, their defining historical moment until now was July 20, 1974, when the Turkish army landed troops in the north and eventually seized control of a third of the island. Many are now comparing the events of March 2013 with that time.

“People have lost all their money,” screamed a young financier Wednesday night, as he knocked back drink after drink at a local nightclub — which, despite the earsplitting din of Greek rap music, was half empty. “To me, that feels like war.”

But on a global scale, investors have refused to panic, other than unloading the risky bonds of second-tier banks in Spain and Italy.

And while the bond yields of Italian government debt have spiked in recent days, a signal of investor wariness, and the euro has traded down against the dollar, the view, for now, is that even though Europe’s handling of the crisis has been a mess, broader contagion has largely been avoided.

“This does not worry us at all — Cyprus is just not systemic,” said a senior executive at a large sovereign wealth fund based in the Middle East, who was not authorized to speak publicly.

Even Cypriot government bonds that are due to reach maturity this June are holding up fairly well, trading at 88 cents, not far from their recent high of 94 cents earlier this week, though a 12 percent discount from their face value.

Local bankers here say that distressed debt hedge funds have been scooping up the paper, betting that, despite all the turmoil, once the Cypriot government secures its 10 billion euro loan from the troika, the government will be in a position to pay the 1.4 billion euros it owes on those bonds in June.

To many, such an exchange rankles. The European Union forces devastating losses on Cypriot savers large and small, while at the same time lending the country billions of euros to make sure it can pay off speculative hedge funds.