Cyprus has clinched a last-minute solution to imminent financial meltdown by agreeing to take up to almost half of the bank savings of the wealthiest.
In return, it secured a €10bn bailout.
The deal, described by the country’s politicians as “painful”, was agreed with euro finance ministers in Brussels just in time.
The ECB had threatened to cut off crucial emergency assistance to Cyprus’s embattled banks if no agreement was reached.
Without that funding, Cyprus’s banks would have collapsed, dragging the country’s economy down with them and threatening its membership of the 17-strong eurozone, all of which would have sent EU markets spinning.
“It’s not that we won a battle, but we really have avoided a disastrous exit from the eurozone,” said finance minister Michalis Sarris.
Markets in Europe reacted positively, opening sharply higher. However, the mood in Nicosia was more sombre.
“This decision is painful for the Cypriot people. This decision was a defeat of solidarity, of social cohesion, which are fundamental freedoms, fundamental principles of the EU,” said parliament president Yiannakis Omirou.
“So as soon as possible we have to prepare our economy to go out from the mechanism and the troika,” he said, referring to the bailout agreement and the three-member delegation who oversee the implementation of bailout measures.
Banks in Cyprus have been closed for more than a week while politicians wrangled on how to raise €5.8bn to qualify for the rescue.
An alternative was needed after MPs defeated the initial plan which would have seized up to 10% of funds in people’s accounts in all banks.
Under the new plan, the bulk of the funds will be raised by forcing losses on wealthy savers in two of the country’s banks, with the remainder coming from tax increases and privatisations.
Laiki, the country’s second- largest bank, will be restructured, with all bondholders and people with more than €100,000 in their accounts facing significant losses. Some estimates say up to 40% will be levied. The bank will be dissolved immediately into a bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation’s biggest lender, Bank of Cyprus.
Deposits at Bank of Cyprus above the €100,000 insured level, will be frozen until it becomes clear to what extent they will also be forced to take losses. The money from those deposits will eventually be converted into bank shares.
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