A new Cyprus bailout deal worth 10 billion euros was announced today by EU leaders which involved shutting down one of the country’s largest banks. The deadline for such a deal was set for today by the European Central Bank.
Eurozone finance ministers have agreed a 10bn-euro bailout deal for Cyprus to prevent its banking system collapsing and keep the country in the eurozone.
Laiki (Popular) Bank – the country’s second-biggest – will be wound down and deposit-holders with more than 100,000 euros ($130,000; £85,000) will face big losses.
However, all deposits under 100,000 euros will be “fully guaranteed”.
The “depositor tax” remains in effect but will only apply to those deposits over 100,0000 euros. The EU leaders seemed to also fear a replay of what happened before as the people of Cyprus do not favor the central planning from EU leaders.
The new deal will not be put to a vote in the Cyprus parliament…
The chairman of the Cypriot parliament’s finance committee, Nicholas Papadopolous, said the agreement made “no economic sense”.
“We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they’ve succeeded in a large part – they’ve destroyed our banking sector,”
Even the EU leaders acknowledge the plan will likely cause “difficulty” for the country and people or so admitted EU Commissioner for Economic Affairs Olli Rehn. There is little doubt that shutting down one of the country’s major banks will put serious pressure on the financial sector if not, as Chairman Papadopolous said, mostly destroy it.
The question that remains is whether this bailout, with its penalty on depositors, causes a run on the peripheral countries in Europe still facing financial difficulties such as Italy, Spain, and Greece. The possibility of bank runs still exists if depositors think a tax is coming, even if that tax only falls on larger deposits.