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The deal Cyprus has agreed with the European Union and the International Monetary Fund to secure a 10 billion euro bailout loan includes major restructuring of its banking sector.
The island’s second largest lender, the mostly state-owned Popular Bank, which is also known as Laiki, will be wound down.
Laiki account holders’ deposits above 100,000 euros will be moved to a so-called bad bank to partially cover losses on loans that were never going to be repaid.
Accounts containing up to 100,000 euros will be shifted over to Bank of Cyprus.
A percentage of those bigger accounts – probably around 30 percent though that has not yet been confirmed – will go towards the bailout.
Under this deal, smaller account holders will not lose out, but shareholders in Laiki and those who bought the bank’s bonds will see those investments become worthless. Bank of Cyprus bondholders will also have to make a contribution.
To find out more about the deal, and its ramifications, euronews reporter Isabel Marques da Silva spoke to Daniel Gros, Director of the Centre for European Studies in Brussels.
The Cyprus bank bailout
The bailout will mean a significant restructuring of Cyprus’ banking sector
The country’s second largest bank, Laiki bank, will be split into two parts, a “bad bank” and “good bank”, before being closed, incurring thousands of job losses
Deposits in Laiki bank of less than 100,000 euros (effectively the “good bank”) are insured by EU law and will be transferred to the country’s biggest bank, Bank of Cyprus
Deposits in Laiki bank of more than 100,000 euros are not insured by EU law and will be put into the “bad bank”
Deposits in this “bad bank” and deposits of more than 100,000 euros in Bank of Cyprus will be frozen and used to pay Laiki’s debts and recapitalize Bank of Cyprus. These uninsured depositors will have to face forced losses of up to 40% on their deposits
Isabel Marques da Silva, euronews: “The markets have reacted positively to the Cyprus deal, despite the unprecedented move to close one of the island’s banks, which until now seemed unacceptable. What lessons can we learn from this deal?”
Daniel Gros, Director, Centre for European Policy Studies: “I think people have now got used to the idea that if a bank has a problem, it should be a problem for the creditors of the bank and not so much for the government. This principle has now been established, I think it makes sense and markets have taken it very well.”
euronews: “The government of Cyprus could not prevent large losses for big private investors, namely Russian depositors. What will happen if other small countries get into a similar situation, maybe Luxembourg or Slovenia, isn’t the risk of contagion still there?”
Daniel Gros: “No, the risk of contagion should be quite limited. The case of Cyprus was really unique in several aspects. Luxembourg has also very large banks, but with one crucial difference: the banks in Luxembourg are all owned by other banks in the eurozone. So the Luxembourg government will never be responsible for anything that happens in Luxembourg. So, savers’ in large countries like Italy or Spain should have no fear and therefore there should be no noticeable contagion.”
euronews: “Anyhow, it is a good solution for the eurozone, but it is harder on the people and the economy of Cyprus. In fact, all the troika leaders have said that unemployment, recession, austerity will follow. So, the German model has prevailed once again?”
Daniel Gros: “This was, if you want, the least bad solution the people of Cyprus could expect, because with the losses now being taken by the creditors of the banks, that means the people of Cyprus will not have to pay taxes to make up for these losses. That the economy would shrink, that there would be loss of employment, we knew. But that is inherent in the fact that the business model of Cyprus has been destroyed and Cyprus will take time to recover.”
euronews: “Anyway, we see people angry in the streets and we see that anti-German rhetoric is on the rise again.”
Daniel Gros:“I think that the largest responsibility for that lies with the government of Cyprus which has portrayed the German government and the troika as the bad guys, which wanted to impose losses on the people of Cyprus, where in fact the opposite was the case.”
euronews: “So, you mean that the deal could have been done in the first eurogroup meeting, without all the drama and all the difficulties afterwards?”
Daniel Gros: “It was necessary to have some theatre, so that Cyprus could actually show that they could say no, and the parliament of Cyprus did say no, but then thought, if we say no, then the cost for the economy will be extremely high. So, in the end, they agreed to a solution that keeps the damage to a minimum.”
euronews: “So, do you think that this deal is also important in terms of the future of the banking union and taxpayers will see how banks can be rescued in future?”
Daniel Gros: “In the future, the ECB will be in charge of the supervision. It will know all the detailed information needed to have negotiations like this. It will be available for the troika and therefore, they will say, under these conditions, we can go into this project of a banking union because the dangers for us – as German taxpayers – are very limited.”