Some sections of this post were recently updated
Following a tense week-end meeting between Cyprus and the so called troika group of international leaders to avoid having Cyprus default on their bad bank loans and lose access to liquidity from the European Central Bank, a last minute plan was approved and later ratified by euro group finance ministers in Brussels late on Sunday.
Last week the European Central Bank (ECB) gave Cypriot lawmakers until Monday March 25th to raise the € 5.8 billion ($7.6 billion) it needs to secure a €10 billion ($13 billion) international bailout which comes on the heels of Cyprus’ Parliament unanimously rejecting an unprecedented one time tax of 6.75 percent on all bank deposits under €100,000 and 9.9 percent over that amount.
After Russia rejected Cyrus’ request for the € 5 billion in financial aid last Thursday, Cypriot lawmakers were scrambling to establish a new financial framework within the country to qualify for the €10 billion international bailout and avert a financial meltdown as Cypriot citizens were seen protesting on the streets and withdrawing as much cash as they could from bank ATM machines around Cyprus since banks were closed since Monday.
Under the terms of the new bailout rescue deal, a “good bank” and a “bad bank” was created which means that the Popular Bank of Cyprus (Laiki Bank) will be shut down.
Bank deposits under €100,000 in the Popular Bank of Cyprus will be safely transferred to the Bank of Cyprus while all uninsured deposits above € 100,000 in both banks will be frozen and used to reduce the large bank debts amassed from Greek bond losses after Greek bondholders were forced to take a “haircut” or write-off from Greek debt during Greece’s debt restructuring with their international lenders from the troika.
Bloomberg reports that two EU officials said “a loss of no more than 40 percent will be imposed on uninsured depositors at the Bank of Cyprus.”
Deposits are protected below the deposit guarantee of € 100,000.
Capital controls are expected to be implemented in an effort to provide greater financial oversight and avoid a massive transfer of wealth when the banks reopen.
Many of the uninsured depositors above € 100,000 expected to take financial losses are Russians who carry an estimated € 30 billion in Cypriot banks and profited in the past from high interest rates on savings combined with low taxation that led to an out-sized banking system in Cyprus relative to Cyprus’ small economy and loose banking regulations.