Cyprus has been struggling for over a year to
finance its banking sector from the exposure to the Greek debt and the crisis
has finally escalated this March. Our summary gives you a short overview of the
situation.
Last
November representatives of the European Commission, the International Monetary
Fund, and the European Central Bank (the Troika) investigated the country's
financial problems and agreed on the bailout terms with the Cypriot Government
with only the amount of money required for the bailout remaining to be agreed
upon. The austerity measures included cuts in civil service salaries, social
benefits, allowances and pensions and increases in VAT, tobacco, alcohol and
fuel taxes, taxes on lottery winnings, property, and higher public health care
charges.
On 16
March 2013, the Troika agreed a €10 billion deal with Cyprus. Weeks of never-ending
negotiations, protests and different ideas followed: the initial plan was about
a one-off bank deposit levy of 6.7% for deposits up to €100,000 and 9.9% for
higher deposits on all domestic bank accounts, however this was rejected by the
Cypriot Parliament. A new plan to restructure the Cyprus Popular Bank, the
second largest bank also known as Laiki Bank was followed by the idea of
preserving all insured deposits of 100,000 Euros or less without a levy, but
shutting down Laiki Bank, levying all uninsured deposits there, and levying 40%
of uninsured deposits in Bank of Cyprus. This uncertainty caused that banks in
Cyprus were closed for approximately 2 weeks. This controversial measure was
needed to prevent withdrawal or transfer of moneys representing the prescribed
levy thus to maintain the vulnerable financial system.
When the
final agreement was settled on 25 March, the idea of imposing any sort of
deposit levy was dropped, as it was instead now possible to reach a mutual
agreement with the Cypriot authorities accepting a closure for Laiki Bank. The
targeted closure of Laiki and the recapitalisation plan for Bank of Cyprus
helped significantly to reduce the needed loan amount for the overall bailout
package. Negotiations on a €10 billion bailout were finally completed on 2
April, but the Cypriot finance minister resigned hours after that.
The
bailout keeps Cyprus in the euro-zone, but the country will be pushed into a
harsh recession and it will take time to rebuild trust in the financial sector.
