Econintersect: European finance ministers have approved the latest proposed 
plan to resolve the Cyprus sovereign debt and bank solvency crisis. After midnight going into Monday morning (25 March 2013) the E-17 (Eurozone) ministers agreed to accept the deal worked out in a separate meeting involving Nicos Anastasiades, Cypriot president, and the heads of the European Commission, José Manuel Barroso, and European Council, Herman Van Rompuy. A key element of the new plan is that deposit guarantees for accounts up to €100,000 will be honored. Failure to do this was one of the key factors that led the Cypriot legislature to unanimously reject a previous plan last week.
The key elements of the new plan include:
- All Cyprus bank deposit guarantees on accounts up to €100,000 will remain in effect.
- The island nation’s largest bank, the Bank of Cyprus, will be reorganized into a much smaller bank with deposits over €100,000 suffering losses as yet unspecified but perhaps as high as 40%.
- Laiki Bank, the second largest, will also have large accounts suffer large losses as well, but early reports do not mention a reorganization.
With the new bank plan resolving a capital shortfall for the banks of approximately €6 billion, the EC (European Commission) and IMF (International Monetary Fund) government bailout of €10 billion will proceed.
The biggest sticking point in reaching the new plan was a disagreement between the Cyprus government, which wanted to preserve both the Bank of Cyprus and the Lauki Bank (Cyprus Popular Bank), and the IMF, which wanted wind down both large banks. The restructuring of the Bank of Cyprus and the continuation of Laiki Bank is much closer to the government desired solution than that proposed by the IMF.
Joshua Chaffin (Financial Times) repports that strict controls on withdrawals and bank transfers are expected in Cyprus when banks are scheduled to reopen on Tuesday morning (26 March 2013).
Coutney Weaver (Financial Times) reports that large Russian clients of Cypriot banks are preparing to transfer assets out of the country. Russians are by far the largest foreign depositors in Cypriot banks.
Sources:
- Cyprus agrees €10bn bailout deal (Peter Spiegel, Financial Times, 25 March 2013)
- EU ministers approve Cyprus bailout deal (Peter Spiegel and Joshua Chaffin, Financial Times, 25 March 2013)
- Cyprus strikes last-minute EU bailout deal (Ian Traynor, The Guardian, 24 March 2013)
- Cypriots braced for tough bank controls (Joshua Chaffin, Financial Times, 24 March 2013)
- Russians prepare to quit Cyprus (Courtney Weaver, Financial Times, 24 March 2013)
