Cyprus: What It Costs to Avoid Bankruptcy

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.