It was just a few years ago that Cyprus was a financial hub and has been attractive to foreign investors. Now the country is facing a financial crisis. In an effort to save the country from sinking deeper, a 10 billion-euro deal, equivalent to about US$13 billion or £8.5 billion financial bailout, agreed by the IMF and the European Union had been concluded in the early morning hours of Monday. On Tuesday it was announced that Michalis Sarris, Cyprus Finance Minister had resigned. He said his task had been concluded and it was but appropriate that he resigned, as there would be investigations on why Cyprus went almost bankrupt.
The financial bailout package carries an interest rate of 2.5%, and is payable within 12 years. Terms of the bailout should be implemented until 2018, instead of 2016 as previously proposed.
Banking crisis
The crisis affects two banks, the Popular Bank or Laiki and the Bank of Cyprus. Mr. Sarris was the Popular Bank’s previous chairman. The Popular Bank will be closed while the Bank of Cyprus will be restructured. Under the terms of the financial bailout, Laiki depositors with accounts larger than 100, 000 euros will stand to lose about a maximum of 60% of their deposits, which will be used to finance the bailout payment. Those whose deposits are less than 100,000 euros, which is about £85,500, will have their accounts moved to the Bank of Cyprus without any cuts. This is good news because the proposal disclosed last week called for a 6.75% tax across the board, which would affect all the depositors of the bank.
Laiki or Popular Bank will be closed, affecting about 4.2 billion euros in deposits. The amount could be entirely wiped out, including the investments from lenders. It is the second largest bank in Cyprus and one of the country’s largest lenders.
The Bank of Cyprus, instead of being closed will be restructured. Smaller deposit accounts, which are about 15,000 in total from Laiki, will be transferred to the bank. However, the bank will not receive bailout money for its recapitalization. It will also inherit the debt of Laiki from the European Central Bank, estimated to be over 9 billion euros. It only received from Laiki the cash to cover the liability for these accounts.
Account holders with deposits worth more than 100,000 euros will have 37.5% of their deposits turned into equity in the Bank of Cyprus, while 22.5% will be used as buffer, which at some stage could also be turned into equity if needed.
Investigations into oversights
Michalis Sarris had only been holding the position of Finance Minister for about two months. He was named to the post in February. He said his resignation will help investigators do their work unhindered. Cyprus President Nicos Anastasiades had accepted his resignation and had already appointed three retired judges from the Supreme Court to lead the inquiry. In the interim, Labor Minister Haris Georgiades had been appointed by the president to be the country’s Finance Minister.
President Anastasiades had instructed that nobody should be exempted from the probe, including family members and the companies that the President had previously headed. A newspaper in Cyprus had published a list of companies that had withdrawn large amounts to cash from Popular Bank before the bailout deal was signed. One of the companies mentioned was A. Loutsios and Sons. The company owners are linked to the President by marriage. It was said to have removed 21 million euros out of Laiki, but a company spokesman said their dealings are transparent.
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