Greece has agreed on a deal for the takeover of local units of stricken Cypriot banks, the two nations said on Friday, helping shield Greek banks from the fallout of the island’s crisis and allowing Cyprus to shrink its bloated banking sector.
At least three Greek banks including Alpha Bank and Piraeus are ready to buy the units of the three Cypriot lenders in Greece, and the country’s bank support fund was meeting on Friday to pick a buyer, officials told Reuters.
“The Cypriot branches in Greece will be sold to one Greek bank,» a senior official at the Hellenic Financial Stability Fund told Reuters, declining to be named. «The fund will assess the offers submitted by Greek banks.”
European shares pared losses after news of the Greek-Cypriot agreement, which fulfills one of the terms of a euro zone bailout deal voted down by the Cypriot parliament earlier this week because of an unpopular levy on banking deposits.
Cyprus said the deal included the «most favourable terms under the present circumstances» for the island nation.
Russia rebuffed Cypriot entreaties for aid on Friday, leaving the island’s increasingly isolated leaders scrambling to strike a bailout deal with the European Union by next week or face the collapse of its financial system.
Cyprus’s top three banks – Bank of Cyprus, Cyprus Popular Bank (CPB), formerly called Laiki, and Hellenic Bank – have small but sizeable operations in Greece, which have been shut all week in line with a bank holiday in the island nation.
They together hold 8 percent of Greek banking deposits, 10 percent of loans and about 300 branches in the country.
Euro zone finance ministers excluded the Greek branches of Cypriot banks from the deposit levy on condition that those units would be transferred to Greek banks, which themselves are being recapitalized by bailout funds from the European Union and International Monetary Fund.
Shares of Greece’s No.2 lender Alpha Bank rose 2 percent while shares of No.3 bank Piraeus surged 5 percent on news of the deal. Hellenic Postbank, a small lender controlled by Greece’s bank bailout fund, could also buy the Cypriot units if interest by other lenders is deemed unsatisfactory, bankers have told Reuters.
Greece had been rushing to wrap up a deal since Monday in a bid to reassure local depositors that their savings were safe, but had to put it on hold after Cyprus rejected the bank levy.
Athens – whose own tottering banks are only slowly seeing deposits trickle back as fears of a Greek euro zone exit fade – was determined to have Cypriot branches reopen after Monday’s public holiday to avoid panic among savers, bankers said.
“The target for the Greek government and the domestic banking system is to fully operate the branches of the Cypriot banks in Greece on Tuesday without restrictions on deposits,» a senior Greek banker said on condition of anonymity.
Investment manager PIMCO, which carried out a review of Cypriot bank capital needs that has yet to be published, had estimated Cypriot banks in Greece needed to be recapitalised with about 1.5 billion euros in funds, the banker said.
Half of that amount is expected to be covered by the Greek bank support fund HFSF and the other half from a Cypriot bailout deal, if one is eventually agreed with the EU and IMF, the banker said.
A sale will also help Cyprus deleverage its vast banking sector, a key demand from the euro zone and the IMF.
The combined assets of Bank of Cyprus and CPB in Greece alone amount to about 22 bln euros or 1.2 times Cyprus’s nearly 18 billion euro economy.
If they are sold, the leverage ratio of Cyprus’s banking system (assets/GDP) will go down to 6.8 from about 8 times, bankers and analysts said, a step in the right direction in the eyes of international lenders.