Heavy losses expected for uninsured Cyprus bank deposits

25 March 2013

It now appears certain that clients of some Cypriot banks will lose a significant portion of deposits above the EUR100,000 insured level, following an agreement between the Cyprus government and the Eurogroup Committee of Eurozone Finance Ministers.

The Popular Bank of Cyprus (Laiki), which is the country's second-biggest bank, is to close. Its liabilities ‒ including EUR4.2 billion in uninsured deposits ‒ will be split off into a ‘bad bank’ which will in due course be liquidated, meaning that clients are at risk of losing all deposits above EUR100,000.

Its ‘good’ assets will be transferred into the largest bank, the Bank of Cyprus, which is also near to insolvency. Uninsured Bank of Cyprus deposits will be frozen until the bank is recapitalised. They will then be subjected to ‘appropriate conditions’, which probably means being partially converted into bank shares. There is speculation that over 20 per cent of uninsured deposits will be confiscated for this purpose.

The island's banking sector holds aggregate deposits of EUR68 billion, of which EUR38 billion is uninsured. Laiki and Bank of Cyprus represent about half of the total. Clients of all other banks appear to be safe.

Also, unlike the government's first plan of a week ago, insured bank deposits under the EUR100,000 level will be protected from any raid. The bulk of the losses will fall on foreign deposit-holders, of which many are reputed to be Russian residents.

Cyprus is also being forced to increase both its corporation tax-rate and its withholding tax-rate on foreign investors' capital gains.

Given these conditions, the European Central Bank will continue to provide the island's banking sector with a flow of Euro credits to keep it afloat.

The Cypriot parliament is not being asked to vote on the new plan, because it is in effect a commercial restructuring of the two largest banks rather than a tax. So the plan is in principle a done deal. However, it is not yet clear whether the banks will reopen tomorrow as previously announced.

Legislation authorising the government to impose controls on capital movements was approved by parliament last Friday, though the Finance Ministry has not yet given details. Whatever happens, there is certain to be frantic attempts to remove funds from Cyprus before the axe falls.

 

planned

 

Sources

AFX News

Independent

Famagusta Gazette (Eurogroup statement)

Cyprus Mail

Economia

BBC News

Reuters

 

 


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