Cyprus talks reach deal for bailout
Eurozone to consider plan for ‘good and bad banks’
CyPruS reached an outline deal with international lenders for a €10 billion euro (£8.5bn) bailout that would shut down its second largest bank, a european union spokesman said early today.
The deal emerged after tense negotiations between President Nicos Anastasiades and heads of the eu, the european Central Bank and the IMF hours before a deadline to avert a collapse of the banking system.
CypRUS, the European Union and the International Monetary Fund have agreed a new plan to try to resolve the island’s shattered banks and finance a rescue of the country, EU officials said early today.
The proposal, which will now be put to eurozone finance ministers for approval, will involve setting up a “good bank” and a “bad bank”.
It will mean the popular Bank of Cyprus, the island’s second largest bank which is also known as Laiki, will effectively be shut down.
Deposits below €100,000 in Laiki will be transferred to Bank of Cyprus, the country’s largest bank. Deposits above €100,000, which under EU law are not insured, will be frozen and will be used to resolve debts. It remains unclear how large the writedown on those funds will be.
No charges will be incurred against any Cypriot bank account with less than €100,000 in them, the officials said. Finance ministers were expected to examine the agreement in detail, but one official said he did not think the outlines of the agreement would change.
“It should be fairly easy for finance ministers to agree to this,” he said. “We have been in close contact with all relevant eurozone countries during this negotiation process and there is broad agreement.”
The plan is likely to mean very heavy losses for uninsured deposits in Laiki, which has suffered since writing down the value of its holdings of Greek government bonds last year. Around €35 billion is held in Cypriot accounts with more than €100,000 in them, but it is not clear how much of that total is held in Laiki bank.
If sufficient funds can be found in Laiki to pay off debt and restructure the Cypriot banking sector, uninsured depositors in Bank of Cyprus may not incur any losses.
One of the officials said shareholders and bondholders in Bank of Cyprus would be part of the “bail-in”, with those investors receiving equity in the bank in exchange.
One potential complication concerns the provision of emergency liquidity assistance (ELA) to both banks by the European Central Bank.
Laiki bank has received €9bn euros of ELA, all of which will be transferred to Bank of Cyprus under the rescue plan. Bank of Cyprus has already received €1bn worth of ELA assistance from the ECB. By taking on Laiki’s obligations, it will now have outstanding assistance of €10bn, which is close to the ECB’s acceptable threshold.
Cypriot politicians had turned to the European Union yesterday in a last-ditch effort after failing for a week to find a solution to the crisis.
Europe’s biggest economy had maintained a hard line on the negotiations. German finance minister Wolfgang Schaeuble cautioned that he was “known for not giving in to blackmail, by nobody and nothing”.
The plan agreed to in marathon negotiations earlier this month, calling for a one-time levy on all bank depositors, ignited anger among Cypriots and failed to garner a single vote in the Cypriot parliament.
The idea of some sort of deposit grab had returned to the fore after Cyprus’s attempt to gain Russian financial aid failed. lA pOWERFUL firecracker was earlier detonated inside a branch of the Bank of Cyprus in Limassol.
Reports said that the explosion late yesterday caused some damage to the branch and that the scene had been cordoned off.
IN NORMAL circumstances, when a bank goes belly up, it is the depositors that are hurt last. On Cyprus, this was being turned on its head as a condition of the European Union-instigated €10 billion (£8.5bn) bail-out package. Bondholders weren’t being touched, while the proposal was to punish depositors through a levy on bank deposits. Such a move was rejected by the Cypriot parliament and could ultimately prove to be a blessing in design.
Leaders and officials can claim Cyprus is a special case as often as they like, but depositors in other eurozone periphery countries won’t be prevented from worrying about their savings. In Italy especially, depositors could get nervous should these levies be enacted.
But it is the Russians who are set to benefit the most from the failure of the EU bailout. Russians hold the majority of the 40 per cent of the €68bn sitting in Cypriot banks and have for decades favoured Cyprus as an attractive place to stash their cash.
Moscow is exerting its influence to offer a potential alternative package, using the crisis as an opportunity to make new inroads into Europe and strengthen its strategic position. Gazprom – the Russian energy giant controlled by the state – seems to have offered Cyprus a proposal in which the corporation will undertake the restructuring of the Cypriot banking system in exchange for exploration rights for natural gas.
In addition, the Russians, who are in danger of losing their important military port in Syria, might be interested in Cyprus as an alternative.
The economic reason for getting depositors involved is that hitting senior holders of bank bonds would cause a domino effect through the eurozone. But, in the end, hitting depositors could turn out to be a wrong decision, if Cyprus makes investors and depositors elsewhere nervous about their savings in other periphery countries, causing capital to flow from the south to the north.
The rejection of the bailout package by the Cypriot parliament might, therefore, prove a blessing in disguise economically, although it is Russia that will ultimately reap the reward if the EU cannot get its act together. l Alex Orr is a board member of the European Movement appear to have accepted that her party got it wrong on the two previous occasions. A seismic shift in attitude, indeed.
rutH marr CONGRATULATIONS on your clear and accurate leader (“Energy crisis needs long-term solution”, 23 March). A “long-term” solution is required, but then it was required decades ago.
We are in this precarious situation because successive governments have ducked the issue, ignoring the advice of scientific advisers.
With electricity, the rot set in when it was privatised, in the mistaken belief that this would reduce costs. Although the nuclear power plants built by the state still operate at moderate cost, that’s because the capital cost did not have to be written off in a short accounting period.
The proposal to build the first privately-funded nuclear station (Hinkley Point) is delayed by negotiations over the return the operator will get from its (allegedly) huge investment (it’s not clear why the cost is so high).
The misguided push for the generation of electricity from socalled renewables has also been profit driven. Private operators want a profit that would be unobtainable without a subsidy unfairly charged to consumers.
In effect, the latter will pay the price for privatising an industry that was well-organised and reasonably efficient.
Steuart CampBell AS A solicitor involved in conveyancing, I readily acknowledge that the legal profession is far from perfect but the apparent concern expressed by the Council of Mortgage Lenders (CML)over increased house buying costs bears further scrutiny (your report, 23 March).
The current malaise in the housing market has little to do with the legal profession and much to do with the profligate policies of mortgage lenders – as has been well documented. The fact that CML members have for several years now sought to lay some of the blame for their losses at the doors of solicitors and surveyors has been instrumental in