Cyprus, the European Union and the International Monetary Fund reached deal in Brussels in the early hours of Monday morning aimed at preventing the bankruptcy of its main banks and a possible euro exit.
“We did not win a battle but we avoided a disastrous exit from the eurozone,” said Cypriot Finance Minister Michalis Sarris after the Eurogroup meeting.
“We have a deal which is good for Cyprus and the European Union,” said Cypriot President Nicos Anastasiades as he left after lengthy talks, during which he was reported to have threatened to resign due to pressure from the troika.
The agreement reached by Anastasiades, International Monetary Fund managing director Christine Lagarde, European Central Bank president Mario Draghi and European Commission Economic and Monetary Affairs Commissioner Olli Rehn after several rounds of talks in Brussels was rubber stamped by the Eurogroup.
The deal foresees the country’s second largest lender, Cyprus Popular Bank (Laiki), going through an immediate resolution process that will see deposits under 100,000 euros, which are guaranteed, being put into a good bank.
Non-performing loans and uninsured deposits will be placed in a bad bank, which will be liquidated over time. Bondholders and shareholders are also set to lose out. This is set to raise 4.2 billion euros.
“There is no denial that Cypriot people will go through tough times as a result of mistakes at the banking level and fiscal excesses,” said Sarris.
The good bank will be merged with the country’s largest lender, the Bank of Cyprus. Uninsured deposits at BoC will face a haircut but none of the officials in Brussels were able to say how large the levy would be. The aim is to achieve a capital ratio of 9 percent.
Sarris indicated that uninsured depositors, including pension funds, would receive equity in return for their savings as part of a recapitalization process.
He also confirmed that the Bank of Cyprus would take over the 9 billion euros of Emergency Liquidity Assistance that the ECB has provided to Laiki. Eurogroup president Jeroen Dijsellbloem said it was likely that the ECB would continue providing liquidity to Bank of Cyprus from Monday.
Deposits at other banks will not be taxed and none of the 10 billion euros Cyprus is to receive from the troika will be used to recapitalize its lenders.
It is not clear when Cypriot banks will open again. Sarris and Dijsellbloem said authorities would assess the situation from Monday before taking a decision.
Nicosia is due to receive its first bailout instalment in May. The IMF will also contribute to the package but Lagarde could not yet say how much.
It is not clear how much this set of measures will raise but Dijsellbloem said it the original figure of 5.8 billion euros should be disregarded.
“The near future will be very difficult for Cyprus but we will work together to overcome problems,” said Rehn, who added that an EU Task Force would be formed to help Cyprus.
“We can start working today to help Cypriot people rebuild their economy,” he said.