Deal Reached On Cyprus Bailout

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The Eurogroup of euro zone finance ministers met in Brussels tonight to approve a plan to bail out the Cypriot banking system.

The new deal will see uninsured deposits at the country's two largest banks take a substantial haircut, but insured depositors – those with less than 100,000 euros in their bank accounts – will be spared from the one-off "tax" that was being considered just a week ago.

Reports of a deal between Cypriot and EU officials being reached prior to the Eurogroup meeting caused the euro and the Australian stock market to spike.

Now, the Eurogroup has signed off on the deal as well.

CNBC's Kelly Evans tweets that Cypriot President Nicos Anastasiades is pleased with the outcome:

Cypriot President Anastasiades just left, saying deal had been reached, he was happy & in best interests of EU.

— Kelly Evans (@Kelly_Evans) March 25, 2013

Below are more details from Reuters on the plan:

It will mean that Popular Bank of Cyprus, the island's second largest bank which is also known as Laiki, will effectively be shut down.

Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus, the country's largest bank. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debts. It remains unclear how large the writedown on those funds will be.

No charges will be incurred against any Cypriot bank account with less than 100,000 euros in them, the officials said.

Because the process will be treated as a bank restructuring as opposed to a nationwide "tax" on bank deposits, it seems that the plan will not be subjected to another vote in the Cypriot parliament, which on Friday passed new laws enabling them to navigate the restructuring process more easily.

The Eurogroup press conference is now underway.

Dutch Finance Minister Jeroen Dijsselbloem, President of the Eurogroup, told reporters that details on how to re-open Cypriot banks will be discussed between Cyprus and the troika tomorrow (which is another bank holiday in Cyprus).

Dijsselboem also said that this deal was better for Cyprus than the one proposed last week as it tackles the problems where they have actually arisen – in the two largest Cypriot banks.

European Commissioner Olli Rehn said the Commission would do what it could to mitigate the social impact of the economic shock the past week's episode has had on Cyprus.

Rehn also said that recent events had a negative impact on the country's growth outlook, and that the European Commission would offer a revised debt sustainability analysis and macroeconomic projections for the Cypriot economy in a final memorandum by mid-April.

IMF Managing Director Christine Lagarde said she expected the country's public debt-to-GDP ratio to fall to 100 percent by 2020, thanks in part to the recent divestiture of Greek units of Cypriot banks.

Dijsselbloem welcomed a contribution from the IMF to the bailout package. Lagarde said she would make a recommendation to the IMF board regarding the matter in the coming weeks, but declined to give a figure.

Regarding the 5.8 billion euros demanded by the EU from Cypriot depositors as their contribution to the bailout, Dijsselbloem said, "Let's forget that number." A revised figure will be determined after the banks are restructured.

Cypriot Finance Minister Michael Sarris would not give a date for when banks in Cyprus – which have been closed since March 15 – would reopen, but he said they would like it to happen as soon as possible.

Furthermore, Sarris sought to reassure that Cypriot savings and living standards would recover from the crisis relatively quickly.

Sarris also said it would take a few days to determine the size of the haircut to uninsured deposits at Bank of Cyprus.

Below is the full Eurogroup statement.

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Eurogroup Statement on Cyprus

The Eurogroup has reached an agreement with the Cypriot authorities on the key elements necessary for a future macroeconomic adjustment programme. This agreement is supported by all euro area Member States as well as the three institutions. The Eurogroup fully supports the Cypriot people in these difficult circumstances.

The programme will address the exceptional challenges that Cyprus is facing and restore the viability of the financial sector, with the view of restoring sustainable growth and sound public finances over the coming years.

The Eurogroup welcomes the plans for restructuring the financial sector as specified in the annex. These measures will form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below EUR 100.000 in accordance with EU principles.

The programme will contain a decisive approach to addressing financial sector imbalances. There will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018. In addition, the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatisation. The Eurogroup welcomes the Terms of Reference for an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions, involving Moneyval alongside a private international audit firm, and is reassured that the launch of the audit is imminent. In the event of problems in the implementation of the framework, problems will be corrected as part of the programme conditionality.

The Eurogroup further welcomes the Cypriot authorities' commitment to take further measures. These measures include the increase of the withholding tax on capital income and of the statutory corporate income tax rate. The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.

The Eurogroup urges the immediate implementation of the agreement between Cyprus and Greece on the Greek branches of the Cypriot banks, which protects the stability of both the Greek and Cypriot banking systems.

The Eurogroup requests the Cypriot authorities and the Commission, in liaison with the ECB, and the IMF to finalise the MoU at staff level in early April.

The Eurogroup notes the intention of the Cypriot authorities to compensate potential individual victims of fraudulent practices, in line with established legal and judicial procedures, outside the programme.

The Eurogroup takes note of the authorities' decision to introduce administrative measures, appropriate in view of the present unique and exceptional situation of Cyprus' financial sector and to allow for a swift reopening of the banks. The Eurogroup stresses that these administrative measures ill be temporary, proportionate and non-discriminatory, and subject to strict monitoring in terms of scope and duration in line with the Treaty.

Against this background, the Eurogroup reconfirms, as stated already on 16 March, that – in principle - financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro area as a whole by providing financial assistance for an amount of up to EUR 10bn. The Eurogroup would welcome a contribution by the IMF to the financing of the programme. Together with the decisions taken by Cyprus, this results in a fully financed programme which will allow Cyprus’ public debt to remain on a sustainable path.

The Eurogroup expects that the ESM Board of Governors will be in a position to formally approve the proposal for a financial assistance facility agreement by the third week of April 2013 subject to the completion of national procedures.

Annex

Following the presentation by the Cyprus authorities of their policy plans, which were broadly welcomed by the Eurogroup, the following was agreed:

1. Laiki will be resolved immediately - with full contribution of equity shareholders, bond holders and uninsured depositors - based on a decision by the Central Bank of Cyprus, using the newly adopted Bank Resolution Framework.

2. Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.

3. The good bank will be folded into Bank of Cyprus (BoC), using the Bank Resolution Framework, after having heard the Boards of Directors of BoC and Laiki. It will take 9 bn Euros of ELA with it. Only uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and may subsequently be subject to appropriate conditions.

4. The Governing Council of the ECB will provide liquidity to the BoC in line with applicable rules.

5. BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.

6. The conversion will be such that a capital ratio of 9 % is secured by the end of the programme.

7. All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.

8. The programme money (up to 10bn Euros) will not be used to recapitalise Laiki and Bank of Cyprus.

The Eurogroup is convinced that this solution is the best way forward for ensuring the overall viability and stability of the Cyprus financial system and its capability to finance the Cyprus economy.



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