A last-minute deal reached in Brussels has averted the imminent financial meltdown of
by securing a bailout on the condition that the island cuts back its banking sector and force large losses on big deposits to help pay much of the bill.
The deal does not need the approval of the Cypriot parliament as it was achieved by restructuring the island’s two largest banks rather than levying a new tax on its citizens. Parliament president, Yiannakis Omirou, said that a €10bn package of loans secured by Cyprus in negotiations was a painful one, but would save his country from a banking system collapse and bankruptcy. Cyprus would now need to work fast to reform its economy and leave the bailout as soon as possible.
Eurozone finance ministers accepted the plan after lengthy negotiations in Brussels between Cypriot officials and the so-called ‘troika’ of creditors; the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB). IMF chief Christine Lagarde said the terms agreed would form “a lasting, durable and fully financed solution”. Cyprus finance minister, Michalis Sarris, commented: “It’s not that we won a battle, but we really have avoided a disastrous exit from the eurozone.”
To secure the rescue loan package, the Cypriot government had to find ways to raise €5.8bn on its own. Most of that amount will be raised by forcing losses on large bank deposit holders, and the remainder will come from tax increases and privatisations.
Cyprus must drastically shrink its banking sector, cut its budget, implement structural reforms and privatize state assets, said Jeroen Dijsselbloem, who chaired the meetings of the eurozone’s finance ministers. All bond holders and savers with more than €100,000 in their bank accounts there face significant losses.
The country’s second-largest bank, Laiki, will be dissolved immediately and restructured into a ‘bad bank’ containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation’s biggest lender, Bank of Cyprus.
Dijsselbloem said it was not yet clear how severe the losses would be to Laiki’s large bank deposit holders, but noted that it is expected to yield €4.2bn, or much of the money that Cyprus needed to raise to secure the bailout. Analysts have suggested that investors might lose up to 40% of their money.
“The near future will be very difficult for the country and its people,” commented the EU commissioner for economic affairs, Olli Rehn. “But the measures will be necessary for the Cypriot people to rebuild their economy on a new basis.”
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