In order to prevent the country from total bankruptcy, Cyprus President, Nicos Anastasiades, has agreed to impose strict regulations on Bank of Cyprus’s large account holders.
These big depositors will be obligated to accept losses of up to 60 percent on accounts exceeding 100,000 euros ($128,000), a figure that is much larger than initially estimated under the European rescue package introduced to save the country.
The Nicosia-based bank has stipulated that 37.5 percent of any deposits above the designated amount of 100,000 euros ($128,000) will be converted into bank shares and the large account holders will receive full bank voting rights and have access to any future Bank of Cyprus dividends. An additional 22.5 percent may be withheld temporarily should the lender determine that this is necessary in order to support the bank's reserves.
The money that is converted to bank shares holds very little value but could, in theory, allow depositors to eventually recover their losses. There is no guarantee that this will ever happen.
The bank arrangement was made in exchange for a 10 billion-euro bailout. An earlier proposed deal with the International Monetary Fund, the European Union, and European Central Bank which would have imposed losses on all depositors was overruled by the Cypriot parliament which elicited concern that such a drastic move would cause total distrust in the Cypriot banking industry.
As such, the remaining 40 percent of Bank of Cyprus deposits above 100,000 euros that aren’t subject to the bail-in will be temporarily frozen and will receive interest of 10 percent above current levels. According to the central bank, this money will be unlocked within a short period of time.
Cyprus Popular Bank (Laiki), the country’s second largest bank, which has sustained the most damage from bad Greek debt and loans, will be divided into “good” and “bad” banks. Deposits of less than 100,000 euros will be absorbed by Bank of Cyprus and those above that level will be placed in the “bad” bank.
In addition, in order to prevent savers from pulling their money out in a mass rush when the bank reopens on April 2nd, Cypriot authorities has imposed a range of restrictions including daily withdrawal limits of 300 euros ($384) for individuals and 5,000 euros for businesses. These are the first capital controls that any country has applied in the Eurozone's 14-year history.
Not everyone is pleased with the agreement. Some economists criticized Cyprus' euro partners for foisting Laiki's troubles on the Bank of Cyprus. Others believe that several euro area countries were interested in putting an end to Cyprus as an international financial service center; others view the move as a way to target the country as a "guinea pig" in order to warn European taxpayers that they should not continue to shoulder the burden of bailing out problem banks.