Cyprus agrees fresh bailout deal with eurozone

25 Mar 13
Eurozone finance ministers have agreed a €10bn bailout deal for Cyprus which will ‘restore the viability’ of the country’s financial sector.

The agreement, reached in Brussels overnight to prevent the collapse of its two largest banks, replaces the controversial earlier deal to levy a one-off tax on all Cypriot savers. That was agreed between the Cypriot authorities, eurozone finance ministers and the International Monetary Fund but was thrown out by the Cypriot Parliament.

Under the latest agreement, the two banks will be restructured and recapitalised through a charge levied on all those holding deposits of €100,000 or more in them. The amount of the charge will be decided by the Central Bank of Cyprus, with shareholders and bondholders also required to contribute. The second largest bank, Laika, will be split into two, with one half – the ‘bad’ bank – wound down and the other half, the ‘good’ bank, absorbed into Cyprus’s largest bank, the Bank of Cyprus.

The Bank of Cyprus will receive a cash injection from the charge and the savers affected given shares in the bank in return. Deposits of less than €100,000 will not be affected and are guaranteed by the European Union.

In a statement, the finance ministers, who are together known as the Eurogroup, said the new agreement would ‘address the exceptional challenges that Cyprus is facing and restore the viability of the financial sector, with the view of restoring sustainable growth and sound public finances over the coming years’.

Taking a ‘decisive approach’ would involve an ‘appropriate downsizing’ of the country’s financial sector, which currently has assets worth over seven times the size of the Cypriot economy.

The Cypriot authorities have also reaffirmed their commitment to increase efforts at fiscal consolidation, structural reforms and privatisation, the Eurogroup noted.

‘Against this background, the Eurogroup reconfirms, as stated already on March 16, that – in principle – financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro area as a whole by providing financial assistance for an amount of up to €10bn. The Eurogroup would welcome a contribution by the International Monetary Fund to the financing of the programme,’ it said.

‘Together with the decisions taken by Cyprus, this results in a fully financed programme which will allow Cyprus’ public debt to remain on a sustainable path.’

IMF managing director Christine Lagarde said the agreement provided a ‘comprehensive and credible’ plan to deal with the challenges facing Cyprus by dealing with the two ‘problem banks’ at the same time as protecting insured deposits.

‘It addresses upfront the core problem of the banking system through a clear strategy that ensures debt sustainability and does not excessively burden the Cypriot taxpayer,’ she said. ‘This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth.’

Legarde added that she now expected to recommend to the IMF’s executive board that it provide funds towards the bailout ‘in coming weeks’.

This deal does not have to be approved by the Cypriot Parliament as it involves bank restructuring rather than a tax.

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