European leaders reached an agreement with Cyprus early on Monday morning that closes down the island’s second-largest bank and inflicts huge losses on wealthy savers.
Those with deposits of less than €100,000 (£85,000) will be spared, but Russians with money in Cypriot banks will lose billions of euros under draconian terms aimed at preventing the Mediterranean tax haven becoming the first country forced out of the single currency.
The deal is expected to wreak lasting damage on the Cypriot economy, which has grown reliant on offshore banking and Russian money. Analysts said Cyprus could see its economy contract by 10% or more in the years ahead.
Shares rallied across the eurozone on news of the deal, which does not need approval from the Cypriot parliament. The FTSE 100 was 0.8% higher and there were gains of around 1% in the German, Spanish and Italian equity markets. The response in the currency markets has so far been muted, with the euro ticking up just 0.1 cent against the dollar.
The final deal came close to what the IMF chief, Christine Lagarde, had demanded a week ago but which was rebuffed by the Cypriot president, Nicos Anastasiades.
Laiki, or Cyprus Popular Bank, is to be closed. Its €4.2bn in deposits over €100,000 will be placed in a “bad bank” and could be wiped out entirely. Those with smaller deposits will see their accounts transferred to Bank of Cyprus.
The Cypriot government reportedly fought hard for Bank of Cyprus to be spared, but the island’s biggest bank will face huge restructuring. No bailout money will be used to the recapitalise it. Instead shareholders and bondholders will be hit. It is thought depositors with more than €100,000 at the bank will also be involved in the recapitalisation, and are expected to face losses of around 30%.
Getting the bank up to healthy EU-mandated capital levels will be made harder by the fact that Bank of Cyprus will inherit a €9bn debt Laiki had with the European Central Bank (ECB).
The bailout deal does not need approval from the Cypriot parliament because it has been achieved by restructuring the country’s two largest banks, rather than levying a new tax on citizens.
Negotiations got under way on Sunday amid a hardening of stance by the IMF and Germany, which insisted that depositors must take the hit for bailing out the eurozone’s latest crisis economy.
Reports suggest that Anastasiades threatened to resign amid demands for a deep restructuring of Cyprus’s banking system, but he remained in his post on Monday morning: “I’m happy because we shall have a programme and it’s in the best interests of the Cyprus people and the European Union,” he said, on leaving the building in Brussels where talks were held.
The ECB had threatened to cut off funds propping up Cypriot banks on Monday, which would have precipitated the island’s exit from the euro if the emergency meeting had not reached an agreement.
Wolfgang Schäuble, Germany’s finance minister, said: “The numbers have not changed. If anything they’ve got worse.” Germany is determined that Cyprus deflate a bloated financial sector that exceeds the size of the Cypriot economy by a factor of seven.
“It is well known that I won’t allow myself to be blackmailed by no one or nothing,” said Schäuble. “I’m aware of my responsibility for the stability of the euro. If we take the wrong decisions we’ll be doing the euro a great disservice,” he told a German Sunday newspaper.
Cyprus had hoped to secure a rescue package from Russia, but the government was forced into fresh negotiations with its troika of lenders – the EU, the IMF and the ECB – after the Cypriot finance minister, Michalis Sarris, returned empty-handed from two days of talks in Moscow last week.
The new bailout deal will hit foreign investors, particularly Russians, hard. Russian nationals are estimated to hold more than €20bn of the €68bn deposited in Cypriot banks.
There were signs of panic over the weekend as a €100 limit was imposed on ATM withdrawals in Cyprus. Officials said they believed the country would now need strict controls on money transfers in and out of the economy in the coming weeks or possibly months, cutting off its citizens and companies from much of the rest of the eurozone’s financial system.
Europe‘s economics commissioner, Olli Rehn, said: “The near future will be very difficult for the country and its people.”
Cyprus bailout deal with EU closes bank and seizes large deposits – The Guardian
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