VIENNA (dpa-AFX) - Cypriot authorities and international creditors has agreed on a bailout deal, clearing the way for the release of EUR 10 billion-aid and eliminating the risk of bankruptcy. The plan includes closure of its second largest bank Laiki or the Cyprus Popular Bank.
The agreement was evolved in a last-ditch effort to avert a collapse of the banking sector, just hours before a deadline set by the European Central Bank. The central bank had threatened to withdraw Emergency Liquidity Assistance (ELA) to Cypriot Banks on Monday, if the country fails come up with a new bailout plan by then.
Cypriot authorities presented the policy plans in Brussels and was endorsed by all euro area member states as well as the troika, consisting of the International Monetary Fund, the European Union and the European Central Bank.
Under the new deal, the Cypriot authorities agreed to resolve Laiki immediately, with full contribution of equity shareholders, bond holders and uninsured depositors. Also, the bank will be split into a good bank and a bad bank.
While the good bank will be folded into the Bank of Cyprus, the bad bank will be run down over time, the Eurogroup said in a statement on Monday. Along with Laiki's viable assets, Bank of Cyprus will also get EUR 9 billion in ELA.
The European Central Bank will provide liquidity to Bank of Cyprus, but the uninsured deposits will remain frozen until recapitalization has been effected. The uninsured deposits may subsequently be subject to appropriate conditions, the Eurogroup said.
Bank of Cyprus will be recapitalised through a deposit or equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders. The conversion will be such that a capital ratio of 9 percent is secured by the end of the program.
The plan envisages protection of all insured depositors and of deposits up to EUR 100,000 in all banks in accordance with the relevant EU legislation. The bailout money of EUR 10 billion will not be used to recapitalise Laiki and Bank of Cyprus, the Eurogroup said in a statement.
The Eurogroup said the solution 'is the best way forward for ensuring the overall viability and stability of the Cyprus financial system and its capability to finance the Cyprus economy.'
The deal has put an end to over a week-long uncertainty over the fate of the Mediterranean Island. The Parliament last week rejected a rescue deal agreed on March 16, under which EU asked Cyprus to impose a 6.75 percent levy on bank deposits of up to EUR 100,000 and 9.9 percent tax for deposits above that amount.
The latest program contains a 'decisive approach to addressing financial sector imbalances,' the Eurogroup said. 'There will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018.'
In addition, Cyprus has committed to step up reform efforts in the areas of fiscal consolidation, structural reforms and privatization. The government has promised to conduct an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions.
Eurogroup welcomed the authorities commitment to take further measures, including the increase of the withholding tax on capital income and of the statutory corporate income tax rate. The Eurogroup said it is looking forward to an agreement between Cyprus and the Russian Federation on a financial contribution.
Euro finance ministers urged Cyprus to immediately implement the agreement with Greece regarding the Greek branches of the Cypriot banks, which protects the stability of both the Greek and Cypriot banking systems.
They also requested the Cypriot authorities and the European Commission, in liaison with the ECB, and the IMF to finalize the MoU at staff level in early April. The ESM Board of Governors is expected to formally approve the proposal for a financial assistance by the third week of April.
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