Monday, 25 March 2013

Cyprus Bailout: Deal or No Deal?

My intentions were good. I was going to stay up and wait for news of an agreement, or no agreement if that was the scenario we were faced with. But with the boyfriend away and my understand of Greek not quite up to the standard required to follow live broadcasts of political/economic discussions, I gave in. 

And overnight, finally, a light at the end of the tunnel. A Deal! Cyprus future is a little more secure than it was 24 hours ago; however that doesn't mean there wont be heartache and suffering. At this stage, I am sure everyone will be affected one way or another. Laiki bank is set to be closed, depositors with over €100,000 will be hit with higher levies than the one the government rejected just a week ago and the affect on the general population of this Mediterranean island is yet to be seen. 

Now the questions start; how is the plan going to be implemented? Is my job safe? How will small businesses survive? When will restrictions on banks and the movement of money stop? Yes, the light at the end of the tunnel is a now a big spotlight shining us in the face, but right behind that is more darkness, uncertainty and anxiety. 

While I would love to explain the details, I think its better coming from the horses mouth. Below is a statement released by the Eurogroup which gives more detail about the plan for Cyprus. 

The Eurogroup has reached an agreement with the Cypriot authorities on the key elements  necessary for a future macroeconomic adjustment programme. This agreement is supported by all
euro area Member States as well as the three institutions. The Eurogroup fully supports the Cypriot  people in these difficult circumstances.
The programme will address the exceptional challenges that Cyprus is facing and restore the viability  of the financial sector, with the view of restoring sustainable growth and sound public finances over
the coming years.
The Eurogroup welcomes the plans for restructuring the financial sector as specified in the annex.  These measures will form the basis for restoring the viability of the financial sector. In particular, they
safeguard all deposits below EUR 100.000 in accordance with EU principles.
The programme will contain a decisive approach to addressing financial sector imbalances. There will  be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the
EU average by 2018. In addition, the Cypriot authorities have reaffirmed their commitment to step  up efforts in the areas of fiscal consolidation, structural reforms and privatisation.
The Eurogroup welcomes the Terms of Reference for an independent evaluation of the  implementation of the anti-money laundering framework in Cypriot financial institutions, involving
Moneyval alongside a private international audit firm, and is reassured that the launch of the audit is  imminent. In the event of problems in the implementation of the framework, problems will be
corrected as part of the programme conditionality.
The Eurogroup further welcomes the Cypriot authorities' commitment to take further measures.  These measures include the increase of the withholding tax on capital income and of the statutory
corporate income tax rate. The Eurogroup looks forward to an agreement between Cyprus and the  Russian Federation on a financial contribution.
The Eurogroup urges the immediate implementation of the agreement between Cyprus and Greece  on the Greek branches of the Cypriot banks, which protects the stability of both the Greek and
Cypriot banking systems.
The Eurogroup requests the Cypriot authorities and the Commission, in liaison with the ECB, and the IMF to finalise the MoU at staff level in early April.
The Eurogroup notes the intention of the Cypriot authorities to compensate potential individual victims of fraudulent practices, in line with established legal and judicial procedures, outside the
The Eurogroup takes note of the authorities' decision to introduce administrative measures,  appropriate in view of the present unique and exceptional situation of Cyprus' financial sector and to
allow for a swift reopening of the banks. The Eurogroup stresses that these administrative measures will be temporary, proportionate and non-discriminatory, and subject to strict monitoring in terms
of scope and duration in line with the Treaty.
Against this background, the Eurogroup reconfirms, as stated already on 16 March, that – in principle - financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro
area as a whole by providing financial assistance for an amount of up to EUR 10bn. The Eurogroup  would welcome a contribution by the IMF to the financing of the programme. Together with the
decisions taken by Cyprus, this results in a fully financed programme which will allow Cyprus’ public  debt to remain on a sustainable path.
The Eurogroup expects that the ESM Board of Governors will be in a position to formally approve the  proposal for a financial assistance facility agreement by the third week of April 2013 subject to the
completion of national procedures.
Following the presentation by the Cyprus authorities of their policy plans, which were broadly  welcomed by the Eurogroup, the following was agreed:
1. Laiki will be resolved immediately - with full contribution of equity shareholders, bond holders and uninsured depositors - based on a decision by the Central Bank of Cyprus, using the newly adopted
Bank Resolution Framework.
2. Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.
3. The good bank will be folded into Bank of Cyprus (BoC), using the Bank Resolution Framework, after having heard the Boards of Directors of BoC and Laiki. It will take 9 bn Euros of ELA with it. Only
uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and may subsequently be subject to appropriate conditions.
4. The Governing Council of the ECB will provide liquidity to the BoC in line with applicable rules.
5. BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full  contribution of equity shareholders and bond holders.
6. The conversion will be such that a capital ratio of 9 % is secured by the end of the programme.
7. All insured depositors in all banks will be fully protected in accordance with the relevant EU
8. The programme money (up to 10bn Euros) will not be used to recapitalise Laiki and Bank of  Cyprus.
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.

Read my other post on the current situation in Cyprus here and here and here


  1. What a crazy situation.. all of us are watching intently to see what this means to the whole banking world.

    1. I know! I don't fully understand the ins and outs of everything thats going to happen with the banks, but thank goodness we didnt have any accounts with laiki. Its affecting the island as a whole and everyone differently. The thing is only time will tell how thins pan out...


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