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After a week of uncertainty, Cyprus has finally reached a deal acceptable to both its parliament and its international creditors.
The deal, formally announced earlier today, will spare deposits below 100,000 euros from any levy, in accordance with EU principles, but deposits above the said amount, however, will bear the burden of raising the 5.8 billion euros required by the troika for Cyprus to receive the bailout.
Last week, public outburst was seen across the island nation after the country’s newly elected President agreed to a one-time levy of 6.75% for deposits below 100,000 euros, as one of the conditions for the country’s banking sector to receive the 10 billion euros rescue package.
Cypriot parliament rejected the deal and went through days of negotiations with the Eurogroup, Russia, and its local political parties for an alternative solution to to avert a default, whilst its banking remained closed for business as people head out to cash disbursing machines to take their money out of their accounts.
Overhauling the Banking Sector
In a statement, the Eurogroup formally accepted Cyprus’ proposal that will overhaul the country’s bloated banking system, multiple times bigger than the country’s gross domestic product.
Laiki Bank, it said, will be broken into a good bank and a bad bank, with the latter to be run down “in time”. Equity shareholders, bondholders, and uninsured depositors of the country’s second largest bank will assume “full contribution”.
Previously, the rescue package offered on the table spared bondholders from any “bail-in” – one of the causes of discontent and disappointment from Cypriot citizens and market analysts alike.
The good bank will be “folded into” Bank of Cyprus, the country’s biggest bank, which will receive Emergency Liquidity Assistance from the European Central Bank. Uninsured deposits in the said bank will be frozen and will be used to capitalise bank, along with contribution from bondholders and equity shareholders.
Eurogroup categorically stated the 10 billion euro rescue package will not be used to recapitalise the two banks, which had suffered losses after being heavily exposed to Greek debt.
“The Eurogroup is convinced that this solution is the best way forward for ensuring the overall viability and stability of the Cyprus financial system and its capability to finance the Cyprus economy,” the 17-member single currency bloc said in a statement.
Markets around the globe rose in a positive response to the resolution of the crisis, whilst the Euro gained against the Pound Sterling, Japanese Yen, and the US Dollar.
Analysts however warned that the crisis is far from over with the pains of rebuilding Cyprus financial market to be felt in the coming months. Eurogroup’s plan is to reduce the size of the country’s banking sector in line with that of other euro-denominated nations by 2018.
