Reports indicate that Cyprus has a draft agreement with the troika of the European Central Bank (ECB), the IMF, and euro zone countries to obtain a €10 billion ($13 billion) bailout that would prevent the country from having to leave the euro zone.
If confirmed, the deal would protect deposits of less than €100,000 at all of the country’s struggling banks, which are insured by the Cypriot government. A week ago, the so-called troika had considered wiping out these deposits altogether. The Popular Bank of Cyprus (better known as Laiki) would split into “good” and “bad” banks, with insured deposits transferred to the larger and more stable Bank of Cyprus. Uninsured deposits at Laiki would be frozen and used to pay down bad debts, meaning they could be partially or completely wiped out. If those deposits are enough to cover all the bank’s losses, it’s possible that uninsured depositors at the Bank of Cyprus and the country’s other banks wouldn’t have to take a haircut, though that remains to be seen.
Reuters and Bloomberg reported that the euro zone finance ministers have signed off on the agreement.
The European Central Bank had threatened to halt its assistance to both banks on Tuesday, a move which would have caused the Cypriot financial system to collapse. It looks like that immediate crisis will now be averted with a last-minute late-night solution. The longer-term consequences for Cyprus and the euro zone, however, are far from settled.
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