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.
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.