25 March 2013

FT: Cyprus agrees €10 billion bailout deal

Cyprus reached an eleventh-hour €10 billion bailout deal with international lenders on Monday morning that avoids a controversial levy on bank accounts but will force large losses on big deposits in the island's two largest lenders.

The plan does not need approval from the Cypriot parliament because the losses on large depositors will be achieved through a restructuring of the island’s two largest banks and not a tax. The parliament passed a new law governing bank failures just three days ago at Brussels’ urging. Mr Dijsselbloem said it remained to be decided whether Cypriot banks would re-open on Tuesday, something that Nicosia and international monitors are scheduled to discuss later on Monday.

In addition to scrapping the countrywide levy and the fact that the new deal does not require parliamentary approval, the biggest difference between the two agreements is that the new programme spares all deposits below €100,000.

The new programme will see Laiki Bank, the country’s second-largest and most troubled financial institution, closed. Its €4.2 billion in deposits over €100,000 will be placed in a “bad bank”, meaning they could be wiped out entirely.  Both junior and senior bondholders in Laiki will be wiped out, a first for a eurozone bailout country; in other bailouts, senior bondholders have not faced such losses.

Only large deposits in Laiki and Bank of Cyprus will suffer losses. Combined, the two banks account for about half of all deposits in the country. Bank of Cyprus will also inherit the €9 billion that Laiki owes the eurosystem for the cheap central bank loans that have kept it on life support in recent months.

Mr Dijsselbloem said no bailout money would be used to recapitalise Bank of Cyprus, meaning authorities must now calculate how much cash from the bank’s large deposit holders must be “bailed in” to get the lender up to healthy, EU-mandated capital levels.

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