Cyprus Bailout: What We Know‏

Just after midnight, the Troika and Cyprus struck a last-minute deal to avoid a complete bankruptcy and potential euro exit of Cyprus

The deal does not have to be approved by the Cypriot parliament as legislation is already in place

The deal may give short-term calm but it raises new potential problems for the future as capital controls and losses on deposits set a dangerous precedence

Capital Control
Future problems in Greece or Spain could escalate faster as capital control and losses for deposits above EUR100,000 will now be seen as a real possibility

As the Cypriot economy is likely to suffer, more bailouts are likely to be necessary in the future

Bailout Details
The second largest bank -- Popular Bank of Cyprus (also known as Laiki) -- will be dissolved immediately. Deposits below EUR100,000 will be shifted to Bank of Cyprus (BoC) to create a ‘good bank’. It will take EUR9bn of ELA with it. Deposits above EUR100,000 will create a ‘bad bank’, which will be run down over time.

The deal between the Troika and Cyprus avoids a levy on bank accounts but will force large losses on big deposits in the island’s two largest lenders.

BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders. The uninsured deposits in BoC will remain frozen at least until recapitalisation has been effected.

The bank restructuring does not need approval by the Cypriot parliament because the losses on large depositors will be achieved through a restructuring of Cyprus’s two largest banks and not a tax. The lawmakers enacted a law-setting procedure for bank resolution on Friday afternoon.

Power To Impose
Anticipating a run when banks reopen, parliament has given the government powers to impose capital controls. Specific capital controls have yet to be announced but they are expected to include restrictions on sending money abroad or moving it among local banks. Current accounts could also be converted to require seven-day notice periods ahead of withdrawals, a Cypriot official said.

It remains to be decided whether Cypriot banks will reopen on Tuesday. This is scheduled to be discussed by Nicosia and international monitors later today.

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