Cyprus bailout: Deal reached in Eurogroup talks

 

"I'm very concerned... for our children, for the future," one Cypriot told the BBC's Tim Willcox

Eurozone finance ministers have agreed a 10bn-euro bailout deal for Cyprus to prevent its banking system collapsing and keep the country in the eurozone.

Laiki (Popular) Bank - the country's second-biggest - will be wound down and deposit-holders with more than 100,000 euros ($130,000; £85,000) will face big losses.

However, all deposits under 100,000 euros will be "fully guaranteed".

Officials warn the island faces a deep recession with many businesses to shut.

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Bondholders and those with deposits of more than 100,000 euros face significant losses; perhaps 40% or more”

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The European Central Bank had set a deadline of Monday for the deal, which came a week after the Cypriot parliament rejected a proposed bank levy on small and large deposits.

The new deal will not be put to a vote in the Cyprus parliament.

IMF head Christine Lagarde said the bailout deal agreed was "a comprehensive and credible plan" to help restore trust in the banking system.

Cypriot Finance Minister Michalis Sarris said he believed the possibility of bankruptcy had been averted.

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There may be some relief that smaller savings no longer face a 6.7% levy, but Cypriot citizens may over time end up feeling more than 6.7% poorer as a result of this so-called bailout”

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"It's not that we won a battle, but we really have avoided a disastrous exit from the eurozone," he said.

There will be relief in Cyprus that small depositors have been protected, but the deal comes at a heavy price, BBC correspondents say.

The chairman of the Cypriot parliament's finance committee, Nicholas Papadopolous, said the agreement made "no economic sense".

"We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they've succeeded in a large part - they've destroyed our banking sector," he told the BBC.

EU Commissioner for Economic Affairs Olli Rehn conceded that the "depth of the financial crisis in Cyprus means that the near future will be difficult for the country and its people".

IMF chief Christine Lagarde: "We believe that this will form a durable and fully financed solution"

Financial markets in Asia and Europe rose in early trading on news of the agreement.

Russian President Vladimir Putin has told his government to look at restructuring a 2.5bn-euro loan extended to Cyprus in 2011.

The BBC's Steve Rosenberg in Moscow says suspicion has been growing in Russia that Europe is using the banking crisis to target Russian money in Cyprus.

Cash cap

Bailout deal

  • To qualify for 10bn-euro bailout, Cyprus must raise 5.8bn euros
  • Its biggest bank - Bank of Cyprus - to be restructured
  • Second biggest bank - Laiki - to be wound up and split into a "good" and "bad" bank
  • Accounts holding under 100,000 euros will be protected in both banks
  • Deposits of more than 100,000 in Bank of Cyprus are frozen for now
  • Level at which funds on big deposits will be taxed is still to be set

The deal came after hours of tense negotiations between Cypriot President Nicos Anastasiades and the "troika" of EU, European Central Bank and IMF leaders.

Under the agreement all deposits of less than 100,000 euros will be secured.

Laiki will be split into "good" and "bad" banks, with its good assets eventually merged into Bank of Cyprus.

The percentage to be levied on large deposits in the Bank of Cyprus - the island's biggest lender - will be resolved in the coming weeks, the president of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, told a press conference overnight in Brussels.

Cyprus government spokesman Christos Stylianides told state radio the level could be set at "around 30%".

Banks in Cyprus have been closed since last Monday while politicians and officials tried to work out how to raise 5.8bn euros to qualify for the bailout. Many businesses are only taking payment in cash.

Cyprus bailout compared with other EU bailouts

On Sunday, Bank of Cyprus further limited cash machine withdrawals to 120 euros a day.

With queues growing outside cash machines, Laiki also lowered its daily limit to 100 euros, Cyprus News Agency reported. The bank's previous limit had been 260 euros per day.

The details of the reopening of Cyprus's banks are to be discussed on Monday.

German pressure

A week ago, the Cypriot parliament rejected a planned bank levy that would have taken 6.75% from small savers and 9.9% from larger investors. The proposal caused widespread anger among ordinary savers.

In response, the European Central Bank (ECB) had said it would cut off funds to Cyprus's banks by Monday unless a new deal was reached.

There is concern on the Mediterranean island that a levy on large-scale foreign investors, many of whom are Russian, will damage its financial sector.

Correspondents say Germany has pushed hard for a levy on investors who have benefited from high interest rates in recent years, rejecting a Cypriot plan to use money from pension funds.

A Cypriot attempt to secure Russian help was unsuccessful.

 

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  • rate this
    +59

    Comment number 243.

    Given the Cypriot link with Russian finance, I cannot see the downside in them leaving the Euro. Cyprus like the UK has always been a crossroads for trade from different regions. Regaining mastery of their own destiny looks positive to me. Doesn't help the Euro group but that should hardly be the responsibly of the Cypriots in the face of such German intransigence.

  • rate this
    +76

    Comment number 99.

    One of the problems associated with Cyprus is they started to neglect other industries such as farming and light manufacturing , in favour of tourism and financial services, this has caused an imbalance in the economy. Cyprus needs to re-examine it's economy and bring it back to a more balance one when this crisis is over.

  • rate this
    +95

    Comment number 96.

    This is the big test as to who comes out on top?

    The populations of whole countries or the wheeler dealer banking spivs who control the money?

    If the bank spivs win & the people have to cough up for their stealing & trousering then it is a disaster for democracy

    The populations of countries must take their hard earned money back into their own hands & out of the pockets of the bankers.

  • rate this
    +13

    Comment number 95.

    I hope the levy plan is made fairer. Those with under €200k euros are not rich Russians, they are hard working people who have scrimped and saved to have a safe old age. The levy should not touch people under €200k and the same protection should be given to Laiki Bank accounts under €200k. I you want to hit the rich (Russian or otherwise) go for the over €200k, €500k, €1m acccounts.

  • rate this
    +48

    Comment number 92.

    Truth is Ordinary Cyprus People are not at Fault. Bankes, Politicians and
    Property Developer are at Fault. Politicans allowed it to Continue, Banks
    allowed lending on overvalued Property and Property swindle. Developers
    sold Properties at overvalued Price and also swindled on borrowing. Cyprus has been Member of EU since January 2008. They are also to be blamed not only for Cyprus but al EUl

 

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