By:DailyForex.com
Cyprus was badly exposed to Greek debt and many investors will already have had to “take a haircut” when the second EU/IMF bailout for Greece was agreed. Unless Cyprus received its own bailout agreement, the nation faced imminent bankruptcy with funding being exhausted by May and, had ECB threats been realised, funding to Cypriot banks could have been cut as early as this Monday which would have forced some banks into bankruptcy.
An initial accord with the EU and IMF agreed a €10 billion bailout, but it was conditional upon Cyprus raising €5.8 billion on its own, through a levy on all bank depositors which would see them paying between 6.7 and 9.9% of their assets. That deal was rejected by the Cypriot parliament, failing to garner a single vote of support. A modified plan which would have protected smaller investors and nationalised pension funds was unacceptable to the EU and IMF with German opposition particularly strong.
In the end, a deal has been agreed between the president of Cyprus, the EU and the IMF which will safeguard Cyprus’s finances. Under the accord, the nation’s second largest bank, Laiki Bank, will be closed, but investors with less than €100000 on deposit will be fully protected. It will split into a “good” and “bad” bank with the assets of the “good” bank transferred to the nation’s largest bank, the Bank of Cyprus.
Investors in the banks with deposits above the €100000 threshold could see up to 40% of their assets taken by the levy such that the nation can meet its €5.8 billion obligation. Presumably, these creditors will be given shares in the Bank of Cyprus to the value of the money levied from them, as proposed in the original agreement.
However, it will be the case that these shares must be held for the foreseeable future and that it will be years before their value recoups the tax that they have just incurred. Since many of the larger depositors are Russian nationals, the move is likely to come under huge criticism from the Russian government who were incensed by the original 9.9% levy.
IMF chief, Christine Lagarde, said that the deal was “a comprehensive and credible plan” that would help to restore confidence in Cyprus’s banking system. The BBC’s business editor, Robert Peston, was less than convinced about the benefit of the deal to Cypriots, however. In the meanwhile, markets around the world have reacted positively to news of the deal.