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Last updated: March 25, 2013 1:57 am
EU ministers have approved a deal that Cyprus reached with international bailout negotiators last night, paving the way for the closure of the island’s second-largest bank and forcing big losses on large depositors in the country’s biggest lender.
The 17 eurozone finance ministers signed off on the agreement in the early hours of Monday in Brussels. The agreement will come as a relief, since deals by the so-called troika – the International Monetary Fund, European Central Bank and European Commission – have been unpicked by ministers in the past.
Under the outlines of the deal, depositors with accounts worth less than €100,000 would not be touched. But those above those levels in Laiki Bank, the second largest and most troubled financial institution, would be severely cut, the officials said. The losses on large deposits in Bank of Cyprus, which will survive as a much smaller entity, have yet to be decided, but could be as high as 40 per cent.
The deal should be enough to release a €10bn bailout package and save the island from bankruptcy.
While the deal spares Cyprus of the sweeping levy on all deposits that caused outrage earlier in the week, it could end up being far more painful for large depositors, including Russian account holders, in both banks. Bank of Cyprus is particularly heavily laden with Russian deposits.
The deal was brokered around midnight in a meeting between Nicos Anastasiades, Cypriot president, and the heads of the European Commission, José Manuel Barroso, and European Council, Herman Van Rompuy, in occasionally tumultuous meetings alongside the finance ministers’ gathering.
People briefed on the talks said at the peak of the late night tumult, senior officials feared no deal would be reached and that Cyprus’s financial system would be decimated when the European Central Bank cut off its vital lending lifeline on Monday.
The meetings, which broke down repeatedly, focused on Cypriot insistence that Bank of Cyprus survive the restructuring of the island’s financial sector. The European Commission supported the Cypriot position, but the IMF had argued for both banks to be wound down.
Even though the IMF ultimately lost that argument, the deal appears very close to the solution it advocated last week with the backing of Germany, which would have closed both Laiki and Bank of Cyprus with losses of 20 to 40 per cent forced on deposits over €100,000.
“We haven’t got much further in the last week,” Wolfgang Schäuble, German finance minister, said as he arrived for the evening meeting. “The numbers have not changed, if anything they have worsened.”
Many Cypriots believe a deal will be punishing whatever the final details because the country’s offshore financial business – the engine of its economy – will be destroyed, crippling its ability to repay bailout lenders.
“If the international business goes, how can you come out of this big hole?” one Cypriot financier said.
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