Current World Debt: $55.3 trillion | U.S.: $19.97 trillion | UK: $2 trillion | China: $1.7 trillion | Canada: $1.67 trillion | Brazil: $1.67 trillion

EU, IMF Bailout Deal with Cyprus

0

Laiki Bank Cyprus(BBC) – Laiki (Popular) Bank – the country’s second-biggest – will be wound down and deposit-holders with more than 100,000 euros ($130,000; £85,000) will face big losses.

However, all deposits under 100,000 euros will be “fully guaranteed”.

Officials warn the island faces a deep recession with many businesses to shut.

The European Central Bank had set a deadline of Monday for the deal, which came a week after the Cypriot parliament rejected a proposed bank levy on small and large deposits.

The new deal will not be put to a vote in the Cyprus parliament.

IMF head Christine Lagarde said the bailout deal agreed was “a comprehensive and credible plan” to help restore trust in the banking system.

Cypriot Finance Minister Michalis Sarris said he believed the possibility of bankruptcy had been averted.

“It’s not that we won a battle, but we really have avoided a disastrous exit from the eurozone,” he said.

There will be relief in Cyprus that small depositors have been protected, but the deal comes at a heavy price, BBC correspondents say.

The chairman of the Cypriot parliament’s finance committee, Nicholas Papadopolous, said the agreement made “no economic sense”.

“We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they’ve succeeded in a large part – they’ve destroyed our banking sector,” he told the BBC.

EU Commissioner for Economic Affairs Olli Rehn conceded that the “depth of the financial crisis in Cyprus means that the near future will be difficult for the country and its people”.

Cash Cap

The deal came after hours of tense negotiations between Cypriot President Nicos Anastasiades and the “troika” of EU, European Central Bank and IMF leaders.

Under the agreement all deposits of less than 100,000 euros will be secured.

Laiki will be split into “good” and “bad” banks, with its good assets eventually merged into Bank of Cyprus.

Cyprus Bailout Comparison ChartThe percentage to be levied on large deposits in the Bank of Cyprus – the island’s biggest lender – will be resolved in the coming weeks, the president of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, told a press conference overnight in Brussels.

Banks in Cyprus have been closed since last Monday and many businesses are only taking payment in cash.

On Sunday, Bank of Cyprus further limited cash machine withdrawals to 120 euros a day.

With queues growing outside cash machines across the island, Laiki also lowered its daily limit to 100 euros, Cyprus News Agency reported.

The bank’s previous limit had been 260 euros per day.

The details of the reopening of Cyprus’ banks are to be discussed on Monday.

German Pressure

A week ago, the Cypriot parliament rejected a planned bank levy that would have taken 6.75% from small savers and 9.9% from larger investors. The proposal caused widespread anger among ordinary savers.

In response, the European Central Bank (ECB) had said it would cut off funds to Cyprus’s banks by Monday unless a new deal was reached.

There is concern on the Mediterranean island that a levy on large-scale foreign investors, many of whom are Russian, will damage its financial sector.

Correspondents say Germany has pushed hard for a levy on investors who have benefited from high interest rates in recent years, rejecting a Cypriot plan to use money from pension funds.

A Cypriot attempt to secure Russian help was unsuccessful.

Details of the Deal

(Reuters) – Cyprus clinched a last-ditch deal with international lenders on Monday for a 10 billion euro ($13 billion) bailout that will shut down its second largest bank and inflict heavy losses on uninsured depositors.

Following is the detail of the deal in a statement from euro zone finance ministers.

1. Laiki will be resolved immediately – with full contribution of equity shareholders, bond holders and uninsured depositors – based on a decision by the Central Bank of Cyprus, using the newly adopted Bank Resolution Framework.

2. Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.

3. The good bank will be folded into Bank of Cyprus (BoC), using the Bank Resolution Framework, after having heard the Boards of Directors of BoC and Laiki. It will take 9 billion Euros of ELA with it. Only uninsured deposits in BoC will remain frozen until recapitalization has been effected, and may subsequently be subject to appropriate conditions.

4. The Governing Council of the ECB will provide liquidity to the BoC in line with applicable rules.

5. BoC will be recapitalized through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.

6. The conversion will be such that a capital ratio of 9 % is secured by the end of the program.

7. All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.

8. The program money (up to 10 billion Euros) will not be used to recapitalize Laiki and Bank of Cyprus.

Comments are closed.

Follow SituationBrief
  • RSS
  • Facebook
  • Google+
  • Twitter
  • RebelMouse