25 March 2013: Euro gains on Cyprus bail-out

The Euro and Asian shares rose on Monday after Cyprus reached a last minute deal with international lenders for a 10 billion euro bailout. The agreement was reached hours before a deadline to avert a financial collapse. The European Central Bank (ECB) had declared on Friday that it would stop emergency liquidity to two big exposed, Cypriot banks, Bank of Cyprus and the Popular Bank, on the 25th if a solution was not found. The deal which is not dependent of support by the Cypriot parliament which last Tuesday rejected a bail-out proposal obtained in Brussels earlier. Euro/USD trades 1.3029; 50 points up from Friday.

During the negotiations all the concerned parties plaid hard ball. The newly elected Cypriot president, Nicos Anastasiades, who is known as Euro-friendly, threatened the Euro-ministers to resign if he was pressed, too, far. Anastasiades also firstly rejected to participate when final EU-meetings were resumed late Sunday night stressing the unacceptability of Cyprus negotiating with a pistol to its head. The German Finance Minister countered claiming a total lack of realism on Cyprus’ behalf. A crisis sentiment ruled during the talks, and in line with Brussels traditions a last minute deal was clinched after 12 hours negotiations.

The deal involves a winding down of the second largest bank, the Popular Bank of Cyprus, Laiki, and shifting deposits below 100 000 euros to the biggest Bank of Cyprus to create a bank with healthy assets. Deposits above 100 000 euros in both banks, which are not guaranteed under EU-law, will be frozen and used to recapitalize the Bank of Cyprus through a deposit/equity conversion. This raid on uninsured Laiki depositors is expected to raise 4,2 billion euros. Up to 40% of the balance on these accounts risk to be confiscated much higher than the 20% originally envisaged. This will especially hurt foreigners and mainly Russian depositors who stand to lose billions of dollars. It is estimated that Russians have deposited up to 35 billion euros in Cyprus.

It is likely that the proposed agreement will create strong negative reactions from Russia, Ukraine and other concerned countries. Prime Minister Medvedev likened last week the EU-proposal with Soviet-type confiscation. Most of the 6 200 employees in Laiki would probably lose their jobs. Employees reacted last week with fury on the proposals and out the President and Parliament under strong pressure. A poll during the weekend showed that 2/3 of the Greek Cypriots preferred to leave the Euro. A week earlier 67% was in favor of the Euro.

The Minister of Finance, Michael Sarris, said in an interview with BBS that the agreement avoided financial disaster for Cyprus. Anastasiades left Brussels without making any comments. A Cypriot exit from the euro might have been avoided in this first round, but the fact that international lenders for the first time during the debt crisis in the Euro zone use sacrosanct private account funds in a bail-in arrangement might have serious contagion consequences all over the euro zone.

Bank employees and the public have additionally taken notice that leading managers in Bank of Cyprus and Laiki lately have received generous parachutes when the two banks for all practical purposes were bankrupt. Many Cypriots are asking the fairness of such parachutes in a situation where the same bankers have gambled with clients money and speculated in treasury bills and unsecured Greek loans. The two biggest banks have 25 billion euros in bad Greek loans after firstly losing billions on the Greek Treasury bill haircut imposed by EU and IMF. 

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