The Eurogroup of euro zone finance ministers approved a last-minute deal for Cyprus that will get a 10 bln euro bailout, but will see its banking sector shrunk by more than half and could risk losing Russian business, a long-standing demand of conservative Germans.
The deal reached just before dawn in Brussels will see second-largest lender Popular Laiki Bank shut down and its “good bank” assets and deposits of under 100,000 euros taken over by Bank of Cyprus.
However, an earlier deal that saw both banks transferring their operations and 20 bln euros in assets in Greece to Piraeus Bank seems to have stalled as the IMF insisted that Bank of Cyprus also carry the 9 bln euro debt provided to Laiki in recent months through the European Liquidity Assistance mechanism. Cyprus President Nicos Anastasiades, who left the negotiations without making any statement, threatened to abandon talks and resign if the IMF had insisted on its hard stance.
Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen, senior bondholders in Laiki would be wiped out and used to resolve Laiki's debts and recapitalise Bank of Cyprus through a deposit/equity conversion, possibly at a rate of 30% of the value of savings accounts.
The raid on uninsured Laiki depositors is expected to raise 4.2 bln euros, said Eurogroup chairman Jeroen Dijssebloem, a staunch opponent of the Cyprus business model and competitively low corporate tax.
"It can't be done without a bail-in in both banks… This is bitter for Cyprus but we now have the result that the (German) government always stood up for," Schaeuble told reporters, saying he was sure the German parliament would approve.
IMF chief Christine Lagarde said the agreement was "a comprehensive and credible plan" that addresses the core problem of the banking system.
"This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth," she said in a statement.
With banks closed for the last week, the Central Bank of Cyprus imposed a 100-euros per day limit on withdrawals from cash machines at the two biggest banks to avert a run.
French Finance Minister Pierre Moscovici rejected charges that the EU had brought Cypriots to their knees, saying it was the island's offshore business model that had failed.
"To all those who say that we are strangling an entire people … Cyprus is a casino economy that was on the brink of bankruptcy," he said.
