Cyprus bailout: £8.5bn rescue by EU and IMF agreed

CYPRUS, the European Union and the International Monetary Fund have agreed a new plan to try to resolve the island’s shattered banks and finance a rescue of the country, EU officials said early today.

The proposal, which will now be put to eurozone finance ministers for approval, will involve setting up a “good bank” and a “bad bank”.

It will mean the Popular Bank of Cyprus, the island’s second largest bank which is also known as Laiki, will effectively be shut down.

Deposits below €100,000 in Laiki will be transferred to Bank of Cyprus, the country’s largest bank. Deposits above €100,000, which under EU law are not insured, will be frozen and will be used to resolve debts. It remains unclear how large the writedown on those funds will be.

No charges will be incurred against any Cypriot bank account with less than €100,000 in them, the officials said. Finance ministers were expected to examine the agreement in detail, but one official said he did not think the outlines of the agreement would change.

“It should be fairly easy for finance ministers to agree to this,” he said. “We have been in close contact with all relevant eurozone countries during this negotiation process and there is broad agreement.”

The plan is likely to mean very heavy losses for uninsured deposits in Laiki, which has suffered since writing down the value of its holdings of Greek government bonds last year. Around €35 billion is held in Cypriot accounts with more than €100,000 in them, but it is not clear how much of that total is held in Laiki bank.

If sufficient funds can be found in Laiki to pay off debt and restructure the Cypriot banking sector, uninsured depositors in Bank of Cyprus may not incur any losses.

One of the officials said shareholders and bondholders in Bank of Cyprus would be part of the “bail-in”, with those investors receiving equity in the bank in exchange.

One potential complication concerns the provision of emergency liquidity assistance (ELA) to both banks by the European Central Bank.

Laiki bank has received €9bn euros of ELA, all of which will be transferred to Bank of Cyprus under the rescue plan. Bank of Cyprus has already received €1bn worth of ELA assistance from the ECB. By taking on Laiki’s obligations, it will now have outstanding assistance of €10bn, which is close to the ECB’s acceptable threshold.

Cypriot politicians had turned to the European Union yesterday in a last-ditch effort after failing for a week to find a solution to the crisis.

Europe’s biggest economy had maintained a hard line on the negotiations. German finance minister Wolfgang Schaeuble cautioned that he was “known for not giving in to blackmail, by nobody and nothing”.

The plan agreed to in marathon negotiations earlier this month, calling for a one-time levy on all bank depositors, ignited anger among Cypriots and failed to garner a single vote in the Cypriot parliament.

The idea of some sort of deposit grab had returned to the fore after Cyprus’s attempt to gain Russian financial aid failed.

• A powerful firecracker was earlier detonated inside a branch of the Bank of Cyprus in Limassol. Reports said that the explosion late yesterday caused some damage to the branch and that the scene had been cordoned off.