Life after Cyprus

25 March 2013 By Neil Unmack Follow @unmack1

Bank bondholders don’t seem to have noticed, but Cyprus has changed their world. They are finally bearing the cost of failure. Terrifying scenarios, from capital controls to a partial breakup, are no longer taboo. And politicians can change the rules of the game overnight.

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Cyprus has agreed terms with euro zone finance ministers and the International Monetary Fund over a 10 billion euro bailout. The agreement followed the Cypriot parliament rejecting a first bailout package, and the European Central Bank threatening to withdraw funding from Cypriot banks if a revised deal couldn’t be reached. The accord avoids the across-the-board levy on deposits that was in the first bailout.
Cyprus will be required to shut down its second-largest bank, and inflict losses on uninsured depositors. Popular Bank of Cyprus, known as Laiki, will be wound down, and its insured depositors sold to Bank of Cyprus. Deposits above 100,000 euros in both banks will be frozen and used to wind down Laiki, and recapitalise Bank of Cyprus.

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