Cyprus avoided its financial collapse on Monday by reaching an agreement in extremis with its partners in the eurozone and the IMF that ultimately protects small savers, but which will mean losses still to be determined by large depositors and other investors and imposes restrictions on capital movements.
Anastasiades: “It’s good for Cyprus and good for the EU” After a long day of negotiations, the EU has reached an agreement on a rescue of 10 billion euros for Cyprus. The commitment has reached the point of expiring on Monday the term given by the European Central Bank (ECB) to cut the liquidity of Cypriot entities, which would have caused its bankruptcy and the country’s exit from the euro. The first stage of the rescue will arrive in May.
” We have an agreement that is in the interest of the Cypriot people and that of the European Union ” (EU), Cypriot President Nikos Anastasiades said , leaving the meeting after more than twelve hours of tense and complex negotiations with the Presidents of the European Commission (EC), José Manuel Durao Barroso, and the Council, Herman Van Rompuy.
The agreement ” is good for Cyprus and good for the EU,” Anastasiades said at the end of the negotiations. His Minister of Economy, Michael Sarris, has said that with this decision has been avoided the disaster and the exit of the country from the euro.
In exchange for help
The Government of Nicosia will have to liquidate the second bank in the country, Laiki, and undergo a thorough restructuring of the Bank of Cyprus, the main entity of the island. Large depositors in these two banks, many Russians will take heavy losses, but small savers with lower accounts are saved to 100,000 euros.
The president of the Eurogroup, Jeroen Dijsselbloem, has not clarified if the Cypriot banks, which have been closed for a week, will be able to reopen this Tuesday and have said that the decision should be taken in the next hours by the Cypriot authorities and the ‘troika’. In addition, he has argued that it is “inevitable” that capital controls are maintained, although these should be “temporary”, “proportional” and “non-discriminatory”, according to the statement approved by the Eurogroup.
The Eurogroup has not clarified if the Cypriot banks can reopen this Tuesday According to the Cypriot news agency, Anastasiades has threatened to resign at the insistence of the IMF in dismantling the Bank of Cyprus. Finally, the ‘troika’ has accepted that this bank survives. On the other hand, the second entity in the country, Laiki, “will be liquidated immediately, with the full contribution of uninsured shareholders, bondholders and depositors”, who will lose 100% of the investment, about 4,200 million euros, according to Dijsselbloem.
Laiki will be divided into a bad bank and a good bank. The good bank will be incorporated into the Bank of Cyprus and will assume the 9,000 million euros that Laiki had through the Emergency Liquidity Assistance “(ELA for its acronym in English) of the ECB.
Reh said that for the first time since the beginning of the crisis the senior debt will be affected, emphasizing that it will only be applied to Laiki and “it is a very small part”, so it is not a change of doctrine ” of the eurozone.
To recapitalize the Bank of Cyprus, no ransom money will be used, but it will be made by converting unsecured deposits and debt into capital. Dijsselbloem has not disclosed the percentage that will be lost in the large deposits of the Bank of Cyprus and has said that it will be calculated in the coming days.
“A good agreement”
The president of the Eurogroup has defended that it is a “better solution” than that reached last week, although in “worse circumstances”. In this regard, he stressed that it avoids a generalized rate on deposits -that was knocked down by the Cypriot Parliament- and the “unfortunate debate” on the guarantee of accounts below 100,000 euros.
The IMF will help finance the rescue The International Monetary Fund (IMF) will help finance the rescue, as announced by its managing director, Christine Lagarde, who has not specified what their contribution will be. Lagarde has praised “the courage of the Cypriot authorities” and has stated that the agreement is “good” because it protects the insured depositors, limits the treatment to the two banks with problems and guarantees an adequate distribution of the burden between Europeans and the Cypriots.
In Spain, Economy Minister Luis De Guindos said that “it is a good agreement and it is conclusive” while stressing that “it is good for Cyprus and good for the whole monetary union”.
“The depth of the financial crisis in Cyprus means that the near future will be very difficult for the country and its citizens, ” the commission’s economic vice-president, Olli Rehn, warned. “The Cypriots must rebuild their economy from a new base,” he stressed. And he has announced that the community executive will create a “working group” to “alleviate the social consequences of this economic ‘shock’ and help protect the most vulnerable.”
Cypriots must rebuild their economy from a new base By not including a deposit fee, the rescue does not need to be ratified by the Cypriot Parliament, which approved last Friday a law to restrict the circulation of capital and another rule on bank restructuring. “As far as we know, the authorities and the governor of the Central Bank of Cyprus have the necessary instruments and powers to liquidate and restructure the banks,” said Dijsselbloem.
On the other hand, it must be approved by the parliaments of Germany, the Netherlands, and Finland.
The final rescue plan is a triumph for the theses of the IMF and Berlin, which from the beginning had defended the losses of the big depositors, many of them Russians, to reduce the ransom bill. The president of the Eurogroup has said that last week there were no political conditions to approve this plan.
The Eurogroup, marginalized
The commitment has been negotiated outside the Eurogroup and closed in previous meetings with Lagarde Anastasiades; and the presidents of the European Council, Herman Van Rompuy; the European Commission, José Manuel Durao Barroso; and the ECB, Mario Draghi.
The 2,500 million euro loan to Nicosia will be renegotiated with Russia. Dijsselbloem and Rehn have also participated in the negotiations. The Eurozone’s finance ministers have limited themselves to ratifying the previous agreement reached by the top leaders of the ‘troika’.
The president of the Eurogroup has also announced that in the coming days will be negotiated with Russia the extension of the terms and the reduction of the interest rates of the loan of 2,500 million euros that Moscow granted to Nicosia in 2011.