Cyprus avoided bankruptcy, and potential turmoil across the Euro zone, by securing a last-minute $13-billion bailout with promises to sharply cut back its oversized banking sector and make large bank account holders take losses to help pay much of the bill.
Negotiations ended today with approval of the deal by the 17-nation Euro zone finance ministers. The European Central Bank had threatened to cut off crucial emergency assistance to the country’s banks by tomorrow if no agreement was reached.
Without a bailout deal by tonight, the tiny Mediterranean nation would have faced the prospect of bankruptcy, which could have forced it to become the first country to abandon the euro currency. That would have sent the region’s markets spinning.
“It’s not that we won a battle, but we really have avoided a disastrous exit from the Euro zone,” said Cyprus’ Finance Minister Michalis Sarris.
The Euro zone finance ministers accepted the plan after hours of negotiations in Brussels between Cypriot officials and the so-called troika of creditors — the International Monetary Fund, the European Commission and the ECB.
“We believe that this will form a lasting, durable and fully financed solution,” said IMF chief Christine Lagarde.
To secure the rescue loan package, the Cypriot Government had to find ways to raise $7.5 billion on its own. Bulk of that money is now being raised by forcing losses on large bank deposit holders, with the remainder coming from tax increases and privatisations.
Cyprus must drastically shrink its banking sector, cut its budget, implement structural reforms and privatise state assets, said Jeroen Dijsselbloem, who chairs the meetings of the Euro zone finance ministers.
Laiki to be restructured
The country’s second-largest bank, Laiki, will be restructured, with all bond holders and people with more than €100,000 in their bank accounts there facing significant losses.
The country’s second-largest bank, Laiki, will be dissolved immediately into a bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation’s biggest lender, Bank of Cyprus.
Analysts have estimated investors might lose up to 40 per cent of their money.
Large deposits with Bank of Cyprus above the insured level will be frozen until it becomes clear whether or to what extent they will also be forced to take losses, the Euro group of finance ministers said in a statement.
The Cypriot Government also approved a set of laws over the past week to introduce capital controls, in order to avoid a huge depositor flight once banks reopen.