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It is part of an estimated total €10.6 billion contribution from investors for restructuring the Cypriot banking sector, which also includes wiping out shareholders and bondholders in Laiki, or Popular, Bank as well as imposing losses on junior bondholders in the Bank of Cyprus and a deposit-for-equity swap. Cyprus will close Laiki, its second biggest bank, and restructure its biggest, Bank of Cyprus, in return for an international loan of €10 billion over three years, without which Cyprus would be unable to pay its debts.
Of the €10 billion loan, €2.5 billion is earmarked for the recapitalisation of the rest of the restructured banking sector, in case more people than expected cannot pay back loans, money possibly needed to recapitalise the Hellenic Bank and the island's cooperative banks. A further €4.1 billion of the loan will go to redeem maturing debt and €3.4 billion to cover government expenses.
The Cypriot banking sector got into trouble mainly because it lost €4 billion, or 22 per cent of Cypriot GDP, on the restructuring of Greek sovereign debt last year, which itself was a condition for a second emergency loan package from the eurozone to Greece.