Preliminary Draft Bailout Deal Reached Between Cyprus And Its Creditors

by Colonel on March 24, 2013

“The Guardian’s economics leader writer, Aditya Chakrabortty, has been mulling over the implications of the suggested deal in political-economic terms, and he reckons it’s pretty damaging for both sides:

In Cyprus, President Nicos Anastasiades, who has been in the job for less than a month, looks like a dead man walking. Going by what’s being briefed tonight, the agreement is substantively the same as that demanded by the Troika last week.

Perhaps a few variables have been changed (such as the protection of smaller savers’ deposits), but not enough.

And if you look at what’s happened to leaders of other peripheral euro countries who’ve accepted the Troika’s structural-adjustment programmes, they’ve nearly all been toast. The one major exception i can think of is Madrid’s Rajoy, who Brussels kindly allowed to do a bit of face-saving.

As for the troika, Oli Rehn et al will be able to claim that at least they avoided the doomsday scenario of pulling the plug on the Cypriot banking sector — with all the turbulence that might entail. And, going by the placidity of continental markets over the past week, they’ll also be entitled to say that they have convinced investors that Cyprus was a tiny economic anomaly rather than the rule.

But again, we’ve had the farce of eleventh-hour negotiations where it looked for a bit as if the fate of a 17-member currency area hung in the balance.

We now have capital controls in an economic area, one of whose main purposes is to facilitate the free flow of capital; I speak as someone who sees a place for capital controls, but some financiers will see that as a dangerous precedent.

While we’re talking about precedents, here are two more:

1. You’ve been treated to the unlovely sight of the Troika and Nicosia apparently agreeing to raid the life savings of small savers. Anyone living in another small, weak, euro member state should take note.

2 And you’ve also had a euro member turning away from its 16 fellow members and towards a non-EU country for help and political support. Just imagine if Cyprus had been dealing with a serious partner, rather than Russia?

So yes, the euro-juggernaut rolls on, even while half an island worth
0,2% of its GDP falls off.

Cyprus faces a Greek-style depression, the crushing of its national business model (the hot money’s already fled to Latvia; and now it won’t be coming) and, I’ll bet, more dollops of austerity. But the euro project has once again been shown to have some serious structural and institutional problems.

” — Copyright 2013 Guardian News & Media Ltd

“Tense negotiations between Cyprus and its international creditors yielded a preliminary agreement early Monday that paves the way for the cash-strapped island nation to receive a 10 billion euro ($13 billion) bailout, a diplomat said.

The agreement between Cyprus, the International Monetary Fund and the European Commission still needs approval by the 17-nation eurozone’s finance ministers, who were also meeting in the same building in Brussels.

Without a deal by Monday night, the tiny Mediterranean island nation of about 1 million would face the prospect of bankruptcy, which could force it to abandon the euro currency and spur turmoil in the eurozone of 300 million people.

Under the last-ditch agreement, Cyprus’ second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euros will have to take losses.

” — Copyright 2013 The Associated Press

“A key meeting of eurozone finance ministers to discuss a bailout for Cyprus to prevent its banking system collapsing has produced a draft deal, officials say.

Reports suggest the deal will include a levy on deposits of more than 100,000 euros in the Laiki (Popular) Bank.

Correspondents say the levy could be as high as 40%.

Cyprus needs to raise 5.8bn euros (£5bn) to qualify for a 10bn-euro EU bailout and avoid bankruptcy.

An EU official told the BBC that under the draft agreement, Cyprus’s troubled Laiki Bank will be wound down with a significant levy affecting those with deposits of over 100,000 euros.

However, the meeting could yet continue for several hours to iron out remaining disagreements.

Laiki is also likely to be split into “good” and “bad” banks.

Earlier reports said good assets would be merged into Bank of Cyprus and administrators appointed to liquidate the remaining toxic assets.

” — Copyright 2013 BBC

“As proposed, the deal would drastically reduce the size of Cyprus’s banking sector, which is eight times bigger than the island’s economic output. …

Last summer, Cyprus’s banks took steep losses on their large holdings of Greek bonds when that nation was given its own bailout and bondholders had to take losses. Coupled with a decline in real estate values, the banking troubles forced Cypriot leaders to formally ask for a bailout.

Under the proposed deal, Laiki Bank, one of Cyprus’s largest, would be wound down and senior bondholders would take losses.

The plan to resolve Laiki Bank should allow the Bank of Cyprus, the country’s largest lender, to survive. But the Bank of Cyprus will take on some of Laiki’s liabilities in the form of emergency liquidity, which has been drip-fed to Laiki by the European Central Bank.

” — Liz Alderman, James Kanter, and Andrew Higgins, Copyright 2013 The New York Times Company

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