Here’s the nut of the Cyprus bank deal:
Laiki, or Cyprus Popular Bank, is to be closed. Its €4.2bn in deposits over €100,000 will be placed in a “bad bank” and could be wiped out entirely. Those with smaller deposits will see their accounts transferred to Bank of Cyprus.
The Cypriot government reportedly fought hard for Bank of Cyprus to be spared, but the island’s biggest bank will face huge restructuring. No bailout money will be used to the recapitalise it. Instead shareholders and bondholders will be hit. It is thought depositors with more than €100,000 at the bank will also be involved in the recapitalisation, and are expected to face losses of around 30%.
Getting the bank up to healthy EU-mandated capital levels will be made harder by the fact that Bank of Cyprus will inherit a €9bn debt Laiki had with the European Central Bank (ECB).
The bailout deal does not need approval from the Cypriot parliament because it has been achieved by restructuring the country’s two largest banks, rather than levying a new tax on citizens.
The €100,000 floor on deposit confiscation should keep people from beheading the current government.
I was trying to understand the difference between Cyprus and Iceland. Both countries had a bank bubble based on foreign debt/investment, but Iceland has its own currency, so during its crisis, it let three banks fail, gave money back to domestic depositors, engaged in a program of domestic debt relief, and let its currency plunge. It also tied up between $3-8 billion of foreign investment. Cyprus is in the Eurozone, so I guess the 30% haircut for (mainly foreign) depositors is the financial equivalent, for them, of Iceland’s currency devaluation, though “the market” didn’t do it. Domestic individual depositors are more-or-less being made whole, but as Atrios points out, some of the “big depositors” are operating accounts for domestic businesses. So the key difference is that domestic depositors don’t get as good a deal as Icelanders, and there’s no domestic debt relief involved? Maybe someone who knows more about this can tell us in the comments, because Iceland seemed to survive what appeared to be, at the time, a complete collapse of their financial system.