BRUSSELS/NICOSIA: Cyprus reached a last-ditch deal with international lenders on a ¤10bn ($13bn) rescue plan to avoid economic meltdown, agreeing to close down its second-largest bank and inflict heavy losses on big depositors.
The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.
Without a deal, Cyprus’s banking system would have collapsed and the country could have become the first to crash out of the European single currency.
Backed by eurozone finance ministers, the plan will spare the Mediterranean island a financial catastrophe by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below ¤100,000 to the Bank of Cyprus to create a “good bank”.
Deposits above ¤100,000 in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalise Bank of Cyprus, the island’s biggest, through a deposit/equity conversion.
The raid on uninsured Laiki depositors is expected to raise ¤4.2bn, Eurogroup chairman Jeroen Dijssebloem said.
Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.
An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned.
Cyprus government spokesman Christos Stylianides said: “We averted a disorderly bankruptcy which would have led to an exit of Cyprus from the eurozone with unforeseeable consequences.”
Asked about the level of losses on uninsured depositors in Bank of Cyprus, he told state radio: “The assessment is that it will be under or around 30 percent.”
The Cyprus central bank said the agreement had also avoided the disorderly default of Laiki Bank.
Russia signalled it would back the bailout even though it would impose big losses on Russian depositors, who have billions in Cyprus banks. President Vladimir Putin ordered officials to restructure a loan Moscow granted to Cyprus in 2011 — having rejected Nicosia’s request for easier terms in crisis talks last week.
Prime Minister Dmitry Medvedev — who ranks below Putin — earlier criticised the bailout, voiced the anger expressed by Russian depositors, saying: “The stealing of what has already been stolen continues.” Among Cypriots, there was a mood of wariness about the deal. “How long will it last?” asked Georgia Xenophontos, 23, a hotel receptionist in Nicosia. “Why should anyone believe anything this government says?”
But many in the capital appeared intent on enjoying a sunny holiday morning, drinking coffee at pavement cafes and watching camera crews filming people drawing money from bank machines. German Chancellor Angela Merkel said the deal was right for Cyprus because it ensured that those who contributed to the crisis were required to pay towards its resolution.
Lefteris Christoforou, vice-chairman of the ruling Democratic Rally party, said it was important that Cyprus had avoided a chaotic bankruptcy. “It is a bad deal, but the extreme scenario we had to contend with was worse.”
A senior source in the Brussels talks said Anastasiades threatened to resign at one stage on Sunday if pushed too far.
The Conservative leader, barely a month in office and wrestling with Cyprus’s worst crisis since a 1974 invasion by Turkish forces split the island in two, was forced to abandon his efforts to shield big account holders. Diplomats said the president had fought hard to preserve the country’s business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons but had lost.
The EU and IMF required that Cyprus raise ¤5.8bn from its banks towards its own rescue in return for ¤10bn in international loans. The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.
IMF chief Christine Lagarde said the agreement was “a comprehensive and credible plan” that addresses the core problem of the banking system. Reuters
