Cyprus secures international bailout to avoid potential economic collapse

The Cyprus government may breathe a sigh of relief after it agreed to a bailout deal with international creditors in the early hours of Monday in Brussels. It will receive 10 billion euros ($13 billion) from Troika lenders – a group comprised of the International Monetary Fund (IMF), the European Central Bank and the European Commission – in order to prevent the island nation from becoming the first country to drop the euro.

In exchange for the large sum of money, Cyprus has agreed to cut its budget, shrink its outsized finance sector, privatize state assets and employ a slate of economic reforms. As part of this, the (ECB) will continue to distribute liquidity to the vestige of the country’s banking system.

Another element of the deal will force Cyprus to raise 5.8 billion euros ($7.5 billion). To actually do this, a significant number of Cypriots will bear the brunt. Laiki, the nation’s second-largest financial institution, will be winding down operations and bond holders and holders of bank deposits of more than 100,000 euros will have to experience significant losses, including affluent Russians. These assets will be frozen and used to pay off the country’s debt

Laiki will be separated into “good bank” and “bad bank.” The “good bank” element will be folded into the Bank of Cyprus, which will also impose similar measures on those holding more than 100,000 euros.

This move is projected to yield 4.2 billion euros and lead to losses on uninsured depositors of about 30 percent. The remainder of the money will come from tax increases and other privatizations.

Individuals with savings up to 100,000 euros in both banks will still be guaranteed under the European Union’s deposit insurance guarantee.

“It’s not that we won a battle, but we really have avoided a disastrous exit from the eurozone,” said Cyprus’ Finance Minister Michalis Sarris. “A long period of uncertainty and insecurity surrounding the Cyprus economy has ended.”

All Cypriot banks have been closed all of last week week in order to permit the bailout deal to be finalized. But this hasn’t stopped depositors from flocking to cash machines all over the country to withdraw their money. Following the announcement, depositors have only been allowed to withdraw 260 euros ($335) each day, down from 800 euros ($1,033).

If the proposals are passed in parliament then authorities would limit withdrawals, convert checking accounts into fixed-term deposits when the banks reopen, restrain check cashing and restrict cash transactions.

Late last week, Eurozone finance ministers issued a statement that noted they were satisfied with the terms of agreement, reports Reuters.

With the shutting down of Laiki, approximately 2,000 jobs will be lost and the restructuring of the bank means that it could eventually jeopardize their retirement savings, funds that have been accrued throughout their entire careers at Laiki.

Since the finance industry is collapsing across the country, many of the employees are concerned that they won’t be able to find work. Therefore, a protest is being planned for Tuesday, a demonstration that could hinder banks from reopening, according to the Financial Times.

The BBC News reports that Cyprus banks with British deposits will remain safe. Deposits will still be guaranteed and Britons can withdraw any amount they like. There are tens of thousands of UK depositors, including 13,000 UK customers at Laiki and 50,000 British customers at the Bank of Cyprus.

Nevertheless, many experts see the country’s move as kicking the can down the road and making any future crisis much more severe.

“It makes the euro zone more susceptible to bank deposit runs in the event that banks come under question,” stated a CitiGroup analysis. “This may make any future bank-related crisis more intense. The fact that deposit insurance was called into question so casually will make other depositors wary of policymaker assurances that they would not behave similarly.”

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