EU and IMF officials struck a last-minute deal with Cyprus early Monday to resurrect a bailout for the island - but one banking chain goes to the wall and major clients, who include many Russians, will take a giant hit.
Final backing was received at around 09am (Hong Kong time), 12 hours into marathon talks for President Nicos Anastasiades with European Union, European Central Bank, International Monetary Fund and euro zone leaders, with Cypriot President Nicos Anastasiades saying he was “content.”
Earlier, Anastasiades had indicated a breakthrough after hours of gruelling talks Sunday evening, as a deadline for the withdrawal of European Central Bank financing loomed.
“Efforts have culminated,” he posted on Twitter.
Soon after, EU sources announced that euro zone finance ministers had given the deal their approval.
The agreement involves breaking up the island’s second largest lender Laiki (Popular Bank).
And the Bank of Cyprus, the island’s No.1, will take a major “haircut” -- a forced wipeout of investment value, on all deposits of more than 100,000 euros.
The Bank of Cyprus, with one third of all holdings, survives, but at a massive price for investors -- and the bank holds most of the island’s offshore Russian deposits.
But the new agreement backs off from last week’s collapsed deal to hit all savers in all banks on the island.
Smaller account-holders will be covered by the EU’s deposit guarantee legislation, which runs to the 100,000-euro (HK$1.01 million) threshold: it is those above that level who face big losses overnight.
As the crisis unfolded last week, Russian leaders refused to cough up fresh aid or extend a next year repayment date on an existing 2.5-billion-euro (HK$25.3 billion) loan to Cyprus.
Both banks stayed closed and by the end of the week had cut cash machine withdrawal limits to as low as 100 euros per day.
The negotiations were aimed at pulling together some seven billion euros, mainly from the Cypriot banking sector, to unlock a 10-billion-euro (HK$101-billion) loans package first agreed nine days ago.
A major sticking-point throughout the talks was the ECB’s demand for the Bank of Cyprus to pay a nine-billion-euro (HK$90.96 billion) Laiki bill due to Frankfurt, which appeared to have been accepted.
“We will do our utmost for Cyprus,” the president had said via Twitter going into Sunday evening’s talks.
Anastasiades met first with ECB head Mario Draghi, IMF managing director Christine Lagarde, EU president Herman Van Rompuy, European Commission head Jose Manuel Barroso, Eurogroup chair Jeroen Dijsselbloem and the economic affairs commissioner Olli Rehn.
Sources at the presidential palace in Nicosia told state media that at one point the Cypriot leader’s frustration boiled over during the talks.
“Do you want to force me to resign?” the Cyprus News Agency quoted Anastasiades as telling the bailout bosses.
The crunch talks in the snow-covered Belgian capital were called after the ECB threatened to halt life-support funding for Cyprus on Monday if there was no deal.
The banks in Cyprus are due to re-open on Tuesday after a 10-day shutdown.
Earlier, French Finance Minister Pierre Moscovici had argued that Cyprus’s euro zone partners needed to see a “just” contribution from major, often international depositors.
It was time to put an end to “casino economy” practices on Cyprus, he insisted.
German Finance Minister Wolfgang Schaeuble also argued that the Cypriot government needed to adopt a “realistic” view, and deliver their end of the deal first agreed the previous weekend.
And EU economics commissiner Olli Rehn warned over the weekend: “There are only hard choices left.”
The volume of Cyprus sovereign aid is a pittance compared with Nicosia’s closest ally Greece, which needed hundreds of billions in the euro zone’s first bailout, which started almost exactly three years ago.
But the worry among some leaders and economists was that fallout from the Cyprus crisis could spread to other troubled economies such as Spain and Italy if a deal was not reached.