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South Cyprus: bailout details

25 March 2013

EU Finance Ministers agreed a deal with South Cyprus late last night. This meeting was delayed several times until proposals were agreeable to the EU.

Details are sketchy still but the main feature is that deposits of 100,000 euros or more will be frozen in the two largest banks and will be greatly devalued.

The second largest bank, Popular Bank of Cyprus (Laiki) will be shut down. Deposits of less than 100,000 euros will be transferred to Bank of Cyprus. The remainder will be transferred to a new ‘bad’ bank. Here they will lose around 40% of their value and be managed as a liquidation process.

This mechanism allows the authorities to bypass the parliament in Cyprus because the losses will be reached through restructuring and not a bank levy.

This deal will mean that Cyprus received the EU bail-out fund of 10 billion Euros as well as liquidity support for the Bank of Cyprus.

However all the other strict terms of the bail-out are still there. That is a major austerity programme, privatisations, and tax increases to come. Coupled to the weak state of the economy, loss of bank jobs, and the loss of a booming financial sector, there will be many years of hardship come.

Capital controls will be introduced on Monday to prevent a run on the banks on Tuesday when they are due to open.

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