Cyprus agrees to split up bad bank in bailout deal

 
Tim Wallace
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THE EUROZONE will lend stricken Cyprus the €10bn (£8.47bn) it needs to avoid bankruptcy, under the terms of a bailout agreed in the early hours of yesterday – but only if the country closes its second biggest bank, inflicts huge losses on uninsured depositors and imposes capital controls to stop money fleeing.

Analysts warned worries will now spread to other peripheral economies as depositors see they may have to pay up when banks fail.

And Cyprus is still not fully secure, with Ladbrokes offering odds of four-to-one that it will request another bailout this year. Even the €10bn combined with a hike in the corporation tax rate left the government €5.8bn short of the money it needed to recapitalise its failed banks.

As a result it agreed to take up to 30 per cent from depositors with over €100,000 in the broken banks, Popular Bank of Cyprus – also known as Laiki – and the Bank of Cyprus. Laiki will be split up, with a bad bank being created and the remains being absorbed into the larger Bank of Cyprus.

Its Greek branches will be sold to Greek banks, and the depositors who lost out in the haircut will be given shares in the combined entity.

Combined with capital controls – expected to stop anyone taking more than €10,000 out of the country – analysts warned confidence has been severely shaken across the EU.

“The Eurozone will have been widely bruised and scarred from the experience of the past ten days. Although it remains just about intact, one of its key features, the free movement of capital, is now severely deformed by the Cypriot capital controls,” said Daiwa’s Chris Scicluna.

Citi’s Giada Giani said the deal has not made banks secure. “Additional capital needs for the surviving banks may emerge as the economy will likely shrink fast and large deposit outflows are likely to emerge when capital controls are lifted,” she warned yesterday.

Cypriot MPs will not vote on the deal, though Germany’s parliament may.

  • US politicians have moved closer to introducing strict controls on banks intended to remove the perception that they are “too big to fail”. Senators have unanimously given support to moves that could prevent US banks with more than $500bn (£329.4bn) in assets from including the likelihood of a bailout in their risk assessments.

THE BAILOUT DEAL

  • Cyprus will borrow €10bn from the Eurozone’s governments.
  • If its economy recovers in the coming years that should leave it with debts of 100 per cent of GDP by 2020.
  • Corporation tax will be put up from 10 per cent to 12.5 per cent.
  • The rest of the funds – €5.8bn – will come from bank depositors.
  • Those with under €100,000 will be untouched.
  • €100,000 is the EU’s guaranteed level (£85,000 in the UK) and regarded as a vital measure to avoid depositors panicking.
  • All depositors in most banks will keep all their money.
  • But in the two largest – Laiki and the Bank of Cyprus – those with over €100,000 will lose out.
  • Those savers will lose around 30 per cent of their deposits.
  • Laiki will be split into a bad bank and wound down, with depositors transferred to Bank of Cyprus.
  • Cash from the larger depositors will be used to raise the Bank of Cyprus’s capital level to nine per cent.
  • To stop customers fleeing a repeat of the bail in, capital controls will stop anyone removing more than €10,000 from the country.
  • Even that might not be enough – analysts already expect another bailout, potentially later this year.
  • Although the deposit guarantee was, in the end, respected, contagion is spreading. Depositors in countries like Spain and Italy are expected to move cash abroad or at least between banks to make sure they come in below €100,000.