Heavy cost to Cyprus bailout
- Published: 25/03/2013 at 09:49 AM
- Online news:
NICOSIA - Cyprus clinched a 10-billion-euro bailout on Monday that averted a "disorderly" eurozone exit, but at the cost of agreeing to painful reforms that will downsize its status as an offshore banking centre.
Cypriot President Nicos Anastasiades leaves following a Eurozone meeting in Brussels, on March 25, 2013. Cyprus has clinched a 10-billion-euro bailout that averted a "disorderly" eurozone exit, but at the cost of agreeing to painful reforms that will downsize its status as an offshore banking centre.
The 11th-hour agreement deals a major hit to investors and depositors in the island's biggest bank, the Bank of Cyprus, many of whom are Russian, and will also effectively shut down its second-largest lender, Laiki.
President Nicos Anastasiades tweeted that he was "content" before flying home from marathon Brussels talks that sealed the agreement in the early hours, which briefly rallied European markets before dealers began to fret about the cost of the deal.
Anastasiades, who reportedly threatened to resign during the tense negotiations, will have to sell the deal to his people when he returns to the island late afternoon.
He is scheduled to make a televised address at 7:00 pm (1700 GMT).
Echoing the sentiment of his people, Cypriot Foreign Minister Ioannis Kasoulides took aim at EU member states that pressed for the onerous measures when he said there was "no place for pressure, threats and blackmail".
"It's a disaster. To me it's too little and too late," Tudor Neagu, a Laiki Bank customer said as he tried and failed to withdraw cash from an ATM in Nicosia. "I doubt Cyprus will ever revive again."
The central bank said no decision has yet been taken on whether commercial banks will reopen as scheduled on Tuesday after a 10-day lockdown imposed on fears of a run on deposits.
The Cypriot authorities have already started to implement the hard-fought agreement, however, with the central bank naming Andri Antoniades as administrator for Laiki.
Under the agreement, Laiki is to be wound up and major depositors at the Bank of Cyprus will face a "haircut" of 30 percent, government spokesman Christos Stylianides said.
"A disorderly default was avoided, which would have meant leaving the eurozone, with devastating consequences," he said.
"Without doubt that there are painful aspects that will place a burden on all of us," he acknowledged nonetheless.
The deal spares all depositors with less than 100,000 euros ($130,000) in the island's banks, a key condition missing from a previous agreement the Cypriot parliament rejected last week.
German Chancellor Angela Merkel, whose government took a hard line in the talks, said she was "very pleased that a solution for Cyprus was successfully reached last night which meant that the country's insolvency was averted".
The deal represents a "fair distribution" of the burden and "also requires those who have contributed to causing these undesirable developments to take responsibility," she said.
The head of the Eurogroup of finance ministers, Jeroen Dijsselbloem, insisted: "We've put an end to the uncertainty that affected Cyprus and the euro area over the last few days."
European stock markets did briefly rally early on but in afternoon shares turned direction, brought lower by the banking sector as investors became nervous the agreement to liquidate Laiki could become an example in other troubled corners of the eurozone.
A big unknown is the reaction of Russian investors, who hold $31 billion (24 billion euros) in private and corporate accounts in Cyprus.
But President Vladimir Putin suggested Russia could pitch in to the Cyprus bailout by easing the terms of a 2.5-billion-euro loan in the wake of the agreement with Brussels.
Cyprus has become heavily reliant on banking deposits, including those of dubious origin, which have swollen to roughly four times the size of the island's entire economy, and the biggest investors stand to lose the most.
The agreement, reached before a Monday deadline set by the European Central Bank, unlocks 10 billion euros in emergency loans from the EU, ECB and IMF.
But the key financial sector has suffered severe damage as the only way Cyprus could come up with the 5.8 billion euros demanded in return.
Cyprus could now be in for a "deep recession caused by the shrinkage of the banking sector and severe de-leveraging," or paying down of debt, UBS economist Reinhard Cluse said.
Under terms of the agreement, risky Laiki assets are to be transferred to a "bad bank" that is slowly wound up.
The valid assets are to be integrated into the BoC, which is then to be recapitalised, a process involving a substantial conversion of uninsured deposits into equity.
The final bailout will also probably involve a government austerity programme, privatisations and tax increases at a time of deepening recession given job losses at banks and companies losing out on deposits.
Economists have forecast the Cyprus economy could now contract by at least 10 percent this year and by 8.0 percent in 2014.
About the author
- Writer: AFP
Position: News agency