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EU and Cyprus agree on €10bn bailout deal

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25th Mar 2013
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The Cypriot government and eurozone finance ministers have agreed a €10bn (£8.5bn) bailout deal that includes a levy on deposits over €100,000.

As part of the restructuring, the country’s second largest bank, Laiki, will be wound down split into good and bad units and eventually merged with the Bank of Cyprus - following a model devised by the UK government to deal with Northern Rock.

Deposits over €100,000 will be subject to a one-off tax, the rate of which has yet to be agreed, and all deposits under that amount will be fully guaranteed.

Cypriot banks - including Laiki, which has branches across the UK - said that UK deposits will not be affected.

Last week the Cyprus government postponed a referendum on a deal that would have imposed a 20% levy on all deposits. There will be no vote on the current deal.

Banks in Cyprus have been shut for the past week, with withdrawal limits on their cash machines as concerned Cypriots queued to withdraw money. The Cypriot government announced that banks will stay closed until Thursday, with measures for money not to leave the country.

The Cypriot government said in an official statement that the agreement will prevent both the country itself and Laiki Bank from defaulting.

The Bank of Cyprus will be restructured and capitalised and acquire performing loans, insured deposits and other assets from Laiki Bank.

“These measures will help create a strong banking sector that will contribute substantially to financial stability and hence stimulate economic growth,” it said.

EU Commissioner for economic affairs Oli Rehn said that the “depth of the financial crisis in Cyprus means that the near future will be difficult for the country and its people”.

Halo Financial’s director David Johnson said that the deal could result in larger investors losing up to 90% of their funds. This won’t make Cyprus or Europe popular with Russian and Eastern European tax avoiders, he added.

“The Euro has recovered some of its lost strength but we haven’t even started to see the repercussions from this move. There is no guarantee that smaller investors will want to keep their funds in Cypriot banks,” he said.

“We don’t yet know what the impact will be on investors in Greece or Italy for example; will investors there take the risk-averse route and push their funds into stronger economies for safety’s sake?

“These are just a few of the questions which remain unanswered but the week ahead will be perhaps one of the most volatile of the year.”

AccountingWEB members recently discussed the Cyprus in blogs and in our previous article, which focused mainly on the issue of Russian offshore investors.

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