- Cyprus bailout agreement of EUR10bn has been reached
- Deposits below EU guarantee of EUR100,000 are spared but the deal creates dangerous precedent for future bail-out negotiations
- Relief rally in financial markets on the back of the bailout deal
Early this morning, Cyprus’s president and the European Union reached agreement on a bailout deal for Cyprus. The deal lines up EUR10bn in financing for the government and according to an article on wsj.com, the deal calls for Cyprus’s second-largest bank, Laiki, to be shut down and split into a good bank and a bad bank. The ‘good bank’ part of Laiki will be moved into Bank of Cyprus, the country’s largest bank, which survives in the new agreement, although aggressively downsized.
Deposits below the EU guarantee of EUR100,000 will be spared while unsecured deposits and bond holders in Laiki will be wiped out. Senior creditors and bond holders will have to take some losses and large depositors in Bank of Cyprus will also take a hit, which, according to several media, could be as high as 40%. However, the level of losses for large depositors will not be clear until later today.
The deal has been ratified by EU finance ministers and the Cypriot parliament does not have to vote again as it passed a bill last week which gives power to impose capital controls and wind up Laiki and split it into a good bank and a bad bank.
Over the weekend, there has been a lot of uncertainty about the outcome of negotiations but a deal was eventually reached at the eleventh hour as the ECB otherwise would have cut off emergency liquidity to Cyprus’s banking system today.
Even though it is positive that we have an agreement and that the agreement means that deposits below the EU guarantee of EUR100,000 are spared, the problems are far from over. Capital control and losses for depositors with money over the deposit guarantee creates a dangerous precedent for future bail-out negotiations. Thus the risk of bank runs and capital flight in Greece and Spain in the future has increased significantly and in the event that new renegotiations are necessary in the two countries it could provide faster unrest since money can flee the country for fear of loss. See also Flash Comment - Cyprus bailout in place - but crisis not solved, 25 March 2013.
The news about the bailout agreement has triggered a relief rally in financial markets and most regional equity indices in Asia are trading higher this morning. Nikkei is up 1.8% and Hang Seng is up 0.75%.
In the FX markets EUR/USD has traded almost a figure higher overnight and is currently seen trading around the 1.3040 levels as the bailout deal has eased concerns about Cyprus and reduced some of the tail risks on the common currency.
To Read the Entire Report Please Click on the pdf File Below.