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March 22, 2013

The Latest Plan in Cyprus

Some news on Cyprus:
Cyprus Passes Parts of Bailout Bill, but Delays Vote on Tax, NY Times: Cyprus’s parliament on Friday partly approved a revised formula for obtaining an international bailout to avert a default, amid strong signals that the plan would not pass muster with international lenders.
But they put off voting on a crucial new proposal until later this weekend — one that would confiscate a stunning 22 percent to 25 percent of uninsured deposits over 100,000 euros through a new tax to be placed on account holders in one of the nation’s most troubled banks.
And so, going into the weekend ahead of a Monday deadline imposed by the European Central Bank, it appeared there was still no immediate path to a lifeline of 10 billion euros, or $13 billion, that Cyprus needs to keep its banks from collapsing. ...
One of the provisions approved by Parliament on Friday would impose new restrictions on withdrawing cash or moving money out of the country when the banks reopen [capital controls]...
Lawmakers also voted to restructure the nation’s largest and most troubled bank, Laiki Bank, by hiving off its troubled assets into a so-called bad-bank. Accounts with no problem would be transferred to the nation’s largest financial institution, the Bank of Cyprus, which lawmakers are now proposing to hit with a 22 to 25 percent tax on uninsured deposits. That measure ... will be considered in coming days...
Cyprus’s so-called troika of lenders — the International Monetary Fund, the European Commission and the European Central Bank — still must approve the plan. ...
Cyprus is imposing the 22-25 percent levy in an attempt to save its largest bank, the Bank of Cyprus. From the WSJ:
As details of the latest plan emerged late Friday, there were signs that the country may be forced to also resolve Bank of Cyprus, its biggest lender, a prospect it was fighting to avert by proposing an even deeper levy on the lender's uninsured depositors than one demanded earlier by euro-zone partners.
However:
Two officials involved in the negotiations said the government in Nicosia was planning to impose a 20% levy on depositors with more than €100,000 in their accounts in Bank of Cyprus. The government hoped that would allow them to protect the lender, which holds more than one third of total deposits on the island, some €28 billion.
But senior European finance-ministry officials in a call Friday evening expressed doubts that the plan would raise enough money to ring fence the lender, according to two officials on the call. ... Resolving both banks "makes more sense," said [one] official. ...
Nevertheless:
The creation of a "good bank" and a "bad bank" could improve Cyprus's lot in two ways. First, creditors of the bad bank could be made to bear steep losses. That would reduce the amount of aid the Cypriot government needs to provide to the banking system. Second, by bolstering Bank of Cyprus, the plan could persuade the ECB to continue providing liquidity to the country's financial system—which it has threatened to cut off.
As it says above, there's "still no immediate path to a lifeline."

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