Cyprus sacrifices top banks to resurrect EU bailout

BRUSSELS, Belgium (2nd UPDATE) – The eurozone struck a deadline-day deal with Cyprus Monday, March 25, to resurrect a bailout for its government but only after a radical downsizing of the island’s Russian-fueled financial sector.

Cyprus President Nicos Anastasiades battled for 12 hours with currency partners and the IMF, but let one banking chain go to the wall and left major investors in the island’s biggest bank take a giant hit.

However, no-one could say when banks on Cyprus — already shut for a 10th day — would re-open, or when restrictions on cash withdrawals and other capital controls would be eased.

They had been scheduled to reopen on Tuesday, March 26.

Anastasiades said he was “content” with the deal.

And the head of the Eurogroup of finance ministers, Jeroen Dijsselbloem of the Netherlands, insisted: “We’ve put an end to the uncertainty that affected Cyprus and the euro area over the last few days.”

Under the terms of the agreement the island’s second largest lender Laiki (Popular Bank) will be wound up overnight, an operation Dijsselbloem said would deliver a 4.2-billion-euro ($5.5 bn) saving.

Even the best-protected senior bondholders investing in the bank would see their holdings “wiped out”, Dijsselbloem told journalists.

Loans to the government in Nicosia once the parliament there approves the deal in April, will be for 10 billion ($13 billion).

The Bank of Cyprus, the island’s No.1 lender, survives: but it will have to endure a major “haircut” — a forced wipeout of investment value, on all deposits of more than 100,000 euros.

That is a massive blow to its major investors — and the bank holds the lion’s share of the island’s Russian deposits.

The previous plan for a raid on all savings, a move that provoked angry response from everyone from pensioners to Russian President Vladimir Putin was ditched.

The new deal, reached after a week of turmoil that plunged the eurozone back into crisis, was a “much better” outcome, said Dijsselbloem.

Key details of the deal remained sketchy, with EU and IMF officials working out the likely percentage levels “over the coming weeks.”

Bailout bosses could “not put a figure on that,” Dijsselbloem said.

The final bailout will also involve a Cypriot government austerity program, privatizations and tax changes at a time of deepening recession given job losses at banks and companies losing out on deposits.

European Union Euro Commissioner Olli Rehn said new economic forecasts for Cyprus would need drawn up quickly to take account of the deal.

Rehn said the Cypriot government would decide when to lift capital controls, which saw daily withdrawal limits at cash machines reduced to as little as 100 euros per day on Sunday.

As the crisis unfolded last week, Russian leaders refused to cough up fresh aid or extend a 2014 repayment date on an existing 2.5-billion-euro loan to Cyprus.

Cyprus Finance Minister Michalis Sarris admitted that Russia’s reaction would likely prove “very complex,” with “loyal international partners disappointed and disillusioned.”

International Monetary Fund head Christine Lagarde said the deal provided “a comprehensive and credible plan to deal with the current economic challenges in the country”.

Once the technical details had been worked out she expected to the IMF executive board that the organization provide Cyprus with financial support, she said in a statement.

A major sticking-point throughout the talks was the European Central Bank’s demand for the Bank of Cyprus to assume nine billion euros in Laiki liabilities to Frankfurt: during Sunday’s talks, Anastasiades finally accepted that.

The ECB had threatened to halt life-support funding for Cyprus on Monday if there was no deal, but Dijsselbloem said he expected that support now to continue.

Anastasiades met first with ECB head Mario Draghi, Lagarde, EU president Herman Van Rompuy, European Commission head Jose Manuel Barroso, Dijsselbloem and Rehn.

Earlier, French Finance Minister Pierre Moscovici had argued that it was time to put an end to “casino economy” practices on Cyprus.

German Finance Minister Wolfgang Schaeuble also argued that the Cypriot government needed to adopt a “realistic” view.

The volume of Cyprus sovereign aid is a pittance compared with Nicosia’s closest ally Greece, which needed hundreds of billions in the eurozone’s first bailout, which started almost exactly three years ago.

But some leaders and economists had worried that the fallout from the Cyprus crisis could spread to other troubled economies such as Spain and Italy.

This latest deal means Cyprus becomes the fifth eurozone country to win international aid for its banks, after Greece, Ireland, Portugal and Spain.

News of the Cyprus deal boosted the Asian markets Monday. The euro also enjoyed a bounce, as investors bought on the back of a deal they hope will draw a line under the crisis, which sent shares tumbling last week. – Rappler.com