European Union sources say the EU, International Monetary Fund and Cyprus have agreed on a deal to bail out the indebted nation, which is going before eurozone ministers for approval.
Reuters is reporting that the proposal means effectively setting up a “good bank” and a “bad bank”, with the Popular Bank of Cyprus (the nation’s second largest bank) to be effectively shut down.
Under the deal, accounts of 100,000 euros or less in the Popular Bank will be transferred to Bank of Cyprus (the nation’s largest bank), while deposits above that amount, which are uninsured, will be frozen and used to help pay off the bank’s debts.
Those large depositors would only get back whatever is left over after creditors are paid.
Under the proposal, all smaller depositors with Cypriot banks (those with accounts less than 100,000 euros) would be fully protected and lose no money, unlike the earlier bailout plan where they would have been hit with a 6.75 per cent levy on the deposits.
Read ABC economics correspondent Stephen Long’s explanation of the Cyprus financial crisis.
However, large depositors, originally up for a 9.9 per cent levy across all Cypriot banks may now lose a much larger proportion of their funds if they are with the Popular Bank.
Reuters reports that, if sufficient funds can be found from large depositors with the Popular Bank, then large depositors with the Bank of Cyprus may not incur losses.
However, an official told Reuters that share and bondholders in the Bank of Cyprus would be part of the “bail-in”, with those investors receiving shares in the bank in exchange.
The deal is reported to be before eurozone finance ministers for approval.
European leaders and Cypriot officials were forced back into negotiations after the original bailout proposal was blocked by the island nation’s parliament following a backlash from depositors who faced a levy of between 6.75 and 9.9 per cent on their funds.