Author:
George Psyllides
Cyprus and international lenders reached a draft deal in the early hours of this morning.
Details of the deal were sketchy but involved heavy levies on both of Cyprus’ biggest banks. Other banks appeared to have been spared. And no charges will be incurred against any Cypriot bank account with less than 100,000 euros in them, EU officials said.
Reuters reported that the deal involves setting up a "good bank" and a "bad bank" and will mean that Popular Bank of Cyprus, known as Laiki, will effectively be shut down.
Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debt. It remains unclear how large the writedown on those funds will be.
Some reports suggested it might be as high as 40 per cent.
"It should be fairly easy for finance ministers to agree to this," an EU official told Reuters. "We have been in close contact with all relevant eurozone countries during this negotiation process and there is broad agreement."
The plan is likely to mean very heavy losses for uninsured deposits in Laiki, which has suffered since writing down the value of its holdings of Greek government bonds last year.
Around 35 billion euros is held in Cypriot accounts with more than 100,000 euros in them, but it is not clear how much of that total is held in Laiki bank.
If sufficient funds can be found in Laiki to pay off debt and restructure the Cypriot banking sector, uninsured depositors in Bank of Cyprus may not incur any losses, although that remains to be seen.
One of the officials said shareholders and bondholders in Bank of Cyprus would be part of the "bail-in", with those investors receiving equity in the bank in exchange.
The draft proposal was agreed by President Nicos Anastasiades in negotiation with European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso. The plan was presented to eurozone finance ministers for discussion, a short time later.
Cyprus acting President Yiannakis Omirou confirmed in Nicosia that an initial agreement had been reached in Brussels.
According to Cyprus News Agency (CNA) sources close to the government, the agreement foresees a 30 per cent “haircut” on Bank of Cyprus deposits over 100,000 euros. But crucially there would be no restructuring of the Bank of Cyprus and it would not be forced to absorb the 9 billion euro burden of emergency liquidity assistance (ELA) of Laiki. This idea, a red line for Anastiasides, had been abandoned the sources said. However, the details remained unclear.
Anastasiades had at one stage threatened to resign last night during tense and protracted negotiations with international lenders.
If a bailout deal is not done and dusted by midnight tonight, the economy faces total collapse as emergency liquidity assistance from the European Central Bank (ECB) will be cut off.
Although Anastasiades travelled to Brussels on a private jet sent by the European Commission early yesterday morning, the day-long talks with the EU, International Monetary Fund (IMF) and the ECB were fraught with tension. On top of that, Anastasiades had to talk back and forth with the presidential palace in Nicosia where political party leaders were holed up awaiting regular briefings from the president.
At one point during the meeting, he reportedly told international lenders during a heated exchange that their proposal to saddle the Bank of Cyprus with some €9 billion in emergency liquidity assistance owed by the Popular Bank to the European Central Bank, effectively meant the lender’s closure in six months.
“I table one proposal, you don’t accept it; I table another, same thing. What else do you want me to do? Do you want to force me to resign? If that’s what you want, let me know,” Anastasiades was quoted as telling international lenders.
"He offered to resign," a source later told Reuters, describing the meeting, which included IMF Chief Christine Lagarde, European Central Bank President Mario Draghi, European Council President Herman Van Rompuy and other top officials, as tense.
A decision had already been taken to resolve the island’s second biggest lender, Laiki, while Nicosia had earlier offered to accept a 20 per cent levy on deposits of over €100,000 in BoC and 4.0 per cent in other banks.
Other reports said the EU was considering a haircut of Cyprus’ debt, similar to what happened in Greece, which the Europeans said had been a one-off.
The government spokesman said earlier the president and his team had a "very difficult task to accomplish to save the Cypriot economy and avert a disorderly default".
The EU's economic affairs chief Olli Rehn said there were no good options but "only hard choices left" for the latest casualty of the euro zone crisis.
Anticipating a run when banks reopen on tomorrow, parliament has given the government powers to impose capital controls.
Earlier yesterday, Anastasiades instructed Cypriot officials to halt talks on the transfer of Cypriot banks’ Greek units to Greece as part of the island’s bailout deal.
Observers suggested that Cyprus wanted to use this as a bargaining chip during last night’s negotiations.
With the operations still in Cypriot hands, a potential collapse of the island’s economy could spread to crisis-stricken Greece.
Reports said that over half of the €9.0 billion in ELA absorbed by Popular had been used to prop up its Greek operations.
French Finance Minister Pierre Moscovici rejected charges that the EU had brought Cypriots to their knees, saying it was the island's offshore business model that had failed.
"To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy," he told Canal Plus television.
Analysts say failure to clinch a deal could cause a wider financial market selloff, but some say the island's small size - it accounts for just 0.2 percent of the euro zone's economic output - means contagion would be limited.
German Finance Minister Wolfgang Schaeuble said there had been little progress since last weekend's attempted bailout deal involving a levy on all bank deposits, which the Cypriot parliament overwhelmingly rejected, but he hoped people in Cyprus now had "a somewhat realistic view of the situation".
Schaeuble said the financial numbers had worsened, if anything, in the intervening week. Asked what a solution would look like, he said: "What we agreed last week."
IMF managing director Christine Lagarde and Germany's Finance Minister Wolfgang Schauble laugh at the start of the Eurogroup meeting in Brussels