Cyprus reached a deal with its European and international lenders, announced early Monday, which is expected to free up aid for the nation’s ailing finances but will also incur a deep restructuring for the country’s banking sector.
The cash-strapped island nation struck a bargain with the European Central Bank (ECB), the European Commission and the International Monetary Fund — collectively known as the Troika — clearing the main hurdle to securing 10 billion euros ($13 billion) in crucial financing.
A Eurogroup statement issued following the deal said “the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatization.”
Market reaction was generally upbeat, with the euro EURUSD +0.60% rallying to $1.3035, up from $1.298 late Friday in North American trade.
Shares in Asia also climbed after the reports of a deal, with Japan’s Nikkei AverageJP:NIK +1.69% trading 1.9% higher, while U.S. stock index futures showed gains, with those for the S&P 500 SPM3 +0.43% up 0.4% and Nasdaq 100 futures NDM3 +0.52% 0.5% higher.
Jeroen Dijsselbloem, head of the Eurogroup of the currency bloc’s finance ministers, said at a press conference after a marathon meeting in Brussels that Cyprus had agreed to a slate of reforms as part of the deal.
Specifically, he said there would now be deep restructuring measures for the two largest Cypriot banks — Popular Bank of Cyprus (also known as “Laiki Bank”) and Bank of Cyprus — as well as a downsizing of the nation’s overall banking sector.
However, the deal wouldn’t affect deposit holders with less than €100,0000 in their accounts, who will receive protection under European principles, he said.
Earlier this month, the Cypriot government had announced a one-time tax on all bank deposits, which sparked a sell-off on global markets and was eventually voted down by parliament in Cyprus.
Most of the policy focus fell on the outsized banking sector, which IMF Managing Director Christine Lagarde described as “the heart of the problem” and said needed to be reduced.
As part of that process, Eurogroup head Dijsselbloem said that Laiki Bank would be split up immediately, “with a full contribution from equity shareholders, bond holders and uninsured depositors.”
He acknowledged that it was the first time that senior bond holders had been hit in the euro zone but said “it’s a unique and exceptional situation” that concerned a bank that needed immediate help.
“Over the last week, the situation in Cyprus and its two banks deteriorated” he said.
Laiki Bank will be split into a “good” and “bad” bank, with the bad bank to be run down over time, he said.
The good bank will be folded into Bank of Cyprus, and all insured deposits will be moved to Bank of Cyprus, as well as the good assets, Dijsselbloem said.
Uninsured deposits at Laiki, comprised of those totaling more than €100,000, amount to €4.2 billion, all of which would be put in the bad bank, Dijsselbloem said.
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