Cyprus wins deal to avert bankruptcy
Settlement means losses for those with deposits of more than 100,000 euros
BRUSSELS Cyprus secured a package of rescue loans in tense, last-ditch negotiations early Monday, two EU diplomats said, saving the country from a banking system collapse and bankruptcy.
The cash-strapped island nation needs a 10-billion euro bailout ($13 billion) to recapitalize its ailing banks and keep the government afloat. The European Central Bank had threatened to cut crucial emergency assistance to the country’s banks by Tuesday without an agreement.
The finance ministers of the 17-nation eurozone accepted the plan reached in 10 hours of negotiations, the diplomats said. They spoke on condition of anonymity pending the official announcement.
Under the plan, Cyprus’s second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euros will have to take losses. It was not immediately clear whether the holders of large deposits in the remaining Cypriot banks would also be forced to take losses.
The diplomats, who spoke on condition of anonymity pending the official announcement, did not elaborate on how much large deposit holders would lose. Making them take a hit is expected to net several billion euros, thus reducing the amount of rescue loans the country needs.
To secure a rescue loan package, Cyprus had to find ways to raise 5.8 billion euros so it could qualify for the 10-billion-euro bailout package. The bulk of that money is now being raised by forcing losses on large deposit holders as well as bond holders in Laiki bank, which will be split into a bad bank of toxic assets and a remaining viable core business.
But Cyprus resisted pressure by creditors to also unwind the country’s largest lender, Bank of Cyprus, one diplomat said.
The European Central Bank had threatened to stop providing emergency funding to Cyprus’ banks as of Tuesday if there were no agreement on how to raise the 5.8 billion euros.
Under the new agreement, average savers’ deposits with all Cypriot banks of up to 100,000 euros will be guaranteed by the state in accordance with the EU’s deposit insurance guarantee, the diplomat said.
In an illustration of the depth of the fear of a banking collapse, Cyprus’ central bank on Sunday imposed a daily withdrawal limit of 100 euros from ATMs of the country’s two largest banks to prevent a bank run by depositors worried about their savings.
Cypriot banks have been closed this past week while officials worked on a rescue plan, and they are not due to reopen until Tuesday. Cash has been available through ATMs, but long lines formed and many machines have quickly run out of cash.
The international creditors, led by the IMF, were seeking a fundamental restructuring of the outsized financial system, which is worth up to eight times the country’s gross domestic product of about 18 billion euros.
They say the country’s business model of attracting foreign investors, among them many Russians, with low taxes and lax financial regulation has backfired and must be upended.