After rejecting a proposal to tax bank depositors to pay for a bailout, Cyprus—with a sharp push from its eurozone peers and the International Monetary Fund—will instead put one bank through a kind of liquidation and radically restructure the other. As a consequence, even if Cypriot banks reopen from an extended holiday this week, big depositors will likely find they are still stuck. That is especially true of those who put money with the second-largest lender, Cyprus Popular Bank PCL, which is being closed down.
Winding up a bank takes time: Deposits and other liabilities are converted into claims on the bank's assets. Liquidators sell the assets and repay the claims piecemeal. "This is not going to be sorted out quickly", says Graham Bishop, a financial consultant who has advised European Union institutions. "You might get the first 10 per cent in a year or so."
The two big Cypriot banks are being treated distinctly. The larger, Bank of Cyprus PCL, is being preserved, in a fashion. Its shareholders and bondholders will suffer losses, and depositors above the €100,000 ($130,000) limit of EU-wide deposit insurance will see some of their cash converted into new equity shares in the bank.
It isn't clear how long this process will take. At a minimum, the authorities need to figure out how much of the uninsured deposits must be converted to equity to make the bank acceptably capitalised. (Turning a deposit into equity increases the bank's capital ratio.) Until then, according to a statement from eurozone finance ministers early Monday, deposits will "remain frozen".
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