Lenders reject Cyprus Plan B

23^rd March 2013

Patrick Corby

Patrick Corby

23 March 2013

European officials have been locked in talks with Cyprus as the country scrambles to form a loan package to recapitalise their banking system that is overleveraged by an enormous 1:8 – most of which is deposits from wealthy Russians and Britons.

Cyprus’ two largest banks Laiki and Bank of Cyprus are now insolvent, without enough capital to secure their enormous debts to be rolled over. Cyprus estimates it needs Eu10Bn to recapitalise.

Cyprus’ first deal package was formed from a Eu2.4Bn loan from Europe and the extra Eu5.8Bn to be seized from domestic Cypriot banks. Through this plan, accounts holders with deposits under Eu100, 000 would be taxed 6.75% and those over Eu100, 000 would be taxed 9.9%.

This package was met with panic and anger when it was  announced on  the 16^th. Cypriots ran to their banks in an attempt to withdraw savings, a typical bank run that further stressed the Cypriot financial system. Banks have been ordered to stay closed until further notice.

Cyprus’ plan B, announced on Friday, was to break up Laiki into a small holders bank of deposits under Eu100,000 and a large holdings bank for deposit accounts over Eu100, 000 – including Cypriot-held international deposits.

Then only the large holding accounts could be tapped at the 9.9% level, leaving the ordinary Cypriot citizens with their savings intact in an attempt to prevent further bank runs in Cyprus.

In return for the increased tax on their accounts, large depositors would have been given shares in the banks whose value is expected to rise in line with “equity returns, guaranteed by future natural gas revenues” in Cyprus.

This represented a very uncertain future return for those holders who would have seen their deposits fall by 9.9%. Noble Energy, the only company to start drilling for shale gas in Cyprus, has not yet bid for more acreage. Even if this came to pass, account holders would only start seeing their savings again in 2020.

Failing to convince anybody, Plan B was rejected by officials in Brussels and Berlin as unworkable.

The European Central Bank on Friday gave Cyprus until Monday to secure a deal or Plan A will be enacted where funds from the ECB will stop and deposits of Eu5.8Bn will be seized.

Cypriot legislators, who hoped to have Plan B voted in and finalised before Monday, are now panicking to put together another package to raise the funds.

One Cypriot official summed the situation up thus: “We are waiting for a messiah to come and save us, and, of course, there is none.”

Patrick Corby