Last-minute deal for Cyprus to hit large depositors

Cyprus bank.jpg

Cyprus clinched a last-ditch deal with international lenders early today (25 March) to shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a €10-billion bailout.

 



The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations in Brussels between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.

Swiftly endorsed by eurozone finance ministers, the plan will spare Cyprus a financial meltdown by winding down Popular Bank, also known as Laiki, and shifting deposits below €100,000 to the Bank of Cyprus to create a "good bank".

Deposits above €100,000 in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalise Bank of Cyprus through a deposit/equity conversion.

 

Laiki Bank foots the bill

The raid on uninsured Laiki depositors is expected to raise €4.2 billion, 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. A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.

German Finance Minister Wolfgang Schäuble said lawmakers would not need to vote on the new scheme, since they had already enacted a law setting procedures for bank resolution.

"It can't be done without a bail-in in both banks… This is bitter for Cyprus but we now have the result that the [German] government always stood up for," Schäuble told reporters, saying he was sure the German parliament would approve.

A senior source in the talks said Anastasiades threatened to resign at one stage on Sunday if he was pushed too far. He left EU headquarters without making any comment.

IMF chief Christine Lagarde said the agreement was "a comprehensive and credible plan" that addresses the core problem of the banking system.

"This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth," she said in a statement.

With banks closed for the last week, the Central Bank of Cyprus imposed a €100 per day 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.

Anxious mood

In the Cypriot capital, Nicosia, the mood on Sunday was anxious.

About 200 bank employees protested outside the presidential palace on Sunday chanting "troika out of Cyprus" and "Cyprus will not become a protectorate".

In a stunning vote last Tuesday, the 56-seat parliament 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.

On Friday, lawmakers voted to nationalise pension funds and split failing lenders into good and bad banks – the measure to be applied to Laiki. The plan to tap pension funds was shelved due to German opposition, a Cypriot official said.

The tottering banks held €68 billion in deposits, including €38 billion in accounts of more than €100,000 – enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own.

Christine Lagarde, managing director of the International Monetary Fund, said: “The agreement reached today on Cyprus provides a comprehensive and credible plan to deal with the current economic challenges in the country. The plan focuses on dealing with the two problem banks and fully protecting insured deposits in all banks. It addresses upfront the core problem of the banking system through a clear strategy that ensures debt sustainability and does not excessively burden the Cypriot taxpayer. This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth.

“We believe the plan provides a durable and fully financed solution to the underlying problems facing Cyprus and places it on a sustainable path to recovery. The staff teams of the IMF and the European partners currently in Cyprus will now work to complete the technical details. Based on this and final agreement of the mission in Cyprus, I expect to make a recommendation regarding potential financial support from the IMF to the Executive Board in coming weeks.”

Co-Presidents of the European Democratic Party (EDP) François Bayrou and Francesco Rutelli said in a statement:

"In these particularly hard times for the Republic of Cyprus, the European Democratic Party wants to express its total solidarity with the Cyprus people and its friends of Evropaiko Komma. Eurogroup and Finance Ministers have to decide on an aid plan to the Cypriot banks. In this context, EDP underlines the gravity of the prolonged phase of crisis in the Cyprus real economy after the envisaged taxation of small deposits of private savings that the European Union has formally pledged to save. EDP wants to draw European leaders’ attention on the vital solidarity that must be applied now to the Republic of Cyprus like any other Eurozone member in the framework of this major financial and economical crisis we have been facing since 2009. Finally, EDP thinks it is urgent to set true European economic governance and a more democratic way of working of European Union, which would have avoided such dramatic events in Cyprus over the last days. This is the price of the future of euro and European Union."

MEP Sharon Bowles, chair of the European Parliament's economic and monetary affairs committee welcomes the agreement on Cyprus, particularly the recognition that banks can fail and that the deposit guarantee principle must be upheld:

"I welcome the new agreement reached earlier today on the Cyprus bail-out, since it is based on a proper hierarchy of losses and on the acceptance that a bank can fail. This is in line with the direction of EU policy and legislation. The deal will however have adverse effects on business and the economy, which, on top of the loss of banking income will need urgent support."

President Nicos Anastasiades, barely a month in office and wrestling with Cyprus' worst crisis since a 1974 invasion by Turkish forces split the island in two, was forced to back down on his efforts to shield big account holders.

Diplomats said the centre-right president had fought hard to preserve the country's business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons but had lost.

The EU and IMF required that Cyprus raise €5.8 billion from its banking sector towards its own financial rescue in return for €10 billion in international loans. The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.

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