Source: Reuters – Cyprus reaches last-minute deal on 10 billion euro bailout
Cyprus clinched a last-ditch deal with international lenders to shut down its second-largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout.
The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.
Without a deal, Cyprus’s banking system would have collapsed and the country could have become the first to crash out of the European single currency.
Swiftly backed by euro zone finance ministers, the plan will spare the Mediterranean island a financial meltdown by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a “good bank”.
Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalize Bank of Cyprus through a deposit/equity conversion.
The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.
Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.
An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned.
Cyprus government spokesman Christos Stylianides said: “We averted a disorderly bankruptcy which would have led to an exit of Cyprus from the euro zone with unforeseeable consequences.”
Among Cypriots, there was a mood of wariness about the deal.
“How long will it last?” asked Georgia Xenophontos, 23, a hotel receptionist in Nicosia. “Why should anyone believe anything this government says?”
Lefteris Christoforou, vice-chairman of the ruling Democratic Rally party, said it was important that Cyprus had avoided a chaotic bankruptcy. “It is a bad deal, but the extreme scenario we had to contend with was worse.”
The Conservative leader, barely a month in office and wrestling with Cyprus’s worst crisis since a 1974 invasion by Turkish forces split the island in two, was forced to abandon his efforts to shield big account holders.
With banks closed for the last week, the Central Bank of Cyprus imposed a 100-euro daily limit on withdrawals from cash machines at the two biggest banks to avert a run.
French Finance Minister Pierre Moscovici rejected charges that the EU had brought Cypriots to their knees, saying it was the island’s offshore business model that had failed.
“To all those who say that we are strangling an entire people … Cyprus is a casino economy that was on the brink of bankruptcy,” he said.
Cyprus’s banking sector, with assets eight times the size of the economy, has been crippled by exposure to Greece, where private bondholders suffered a 75 percent “haircut” last year.
Without a deal by the end of Monday, the ECB said it would have cut off emergency funds to the banks, spelling certain collapse and potentially pushing the country out of the euro.
Anticipating a run when banks reopen on Tuesday, parliament has given the government powers to impose capital controls.
On Tuesday, the 56-seat parliament had rejected a levy on depositors, big and small. Finance Minister Michael Sarris then spent three fruitless days in Moscow trying to win help from Russia, whose citizens and companies have billions of euros at stake in Cypriot banks.
The tottering banks held 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros – enormous sums for an island of 1.1 million people that could never sustain such a big financial system on its own.