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Cyprus: Big depositors face cut of 40%, minister says Cyprus: Big depositors face cut of 40%, minister says
(about 1 hour later)
Cyprus's finance minister has confirmed that Cypriot depositors with less than 100,000 euros in their accounts "will not be hit".Cyprus's finance minister has confirmed that Cypriot depositors with less than 100,000 euros in their accounts "will not be hit".
But people with more than this could see about 40% of their deposits converted into bank shares, Michalis Sarris told the BBC.But people with more than this could see about 40% of their deposits converted into bank shares, Michalis Sarris told the BBC.
"The exact percentage is not... yet decided but it is going to be significant," he said. "The exact percentage is not... yet decided but it is going to be significant," he said.
The final figure will depend on how the government decides to protect pensions. Bank of Cyprus chairman Andreas Artemis later handed in his resignation.
He confirmed that all Cypriot banks will remain closed until Thursday and that capital controls will be placed on the size and the amount of money people will be allowed to withdraw once they have reopened. Media reports said his letter would be examined by the bank's board of directors when they convened in the afternoon.
Capital controls
The final size of the loss faced by investors will depend on how the government decides to protect pensions, Mr Sarris said.
He confirmed that all Cypriot banks will remain closed until Thursday and that capital controls will be placed on the size and the amount of money people will be allowed to withdraw once the banks have reopened.
These restrictions would "probably be a bit stricter" on the country's two largest banks, Bank of Cyprus and Laiki, and would remain in place until the banking system "stabilises", he said.These restrictions would "probably be a bit stricter" on the country's two largest banks, Bank of Cyprus and Laiki, and would remain in place until the banking system "stabilises", he said.
The exact details of this "two tier system" would be hammered out with the banks later on Tuesday, he said.The exact details of this "two tier system" would be hammered out with the banks later on Tuesday, he said.
Mr Sarris is expecting "some bleeding, some outflow" of funds once the banks reopen, but believes that once EU bailout funds begin flowing "in a matter of weeks", confidence will return.Mr Sarris is expecting "some bleeding, some outflow" of funds once the banks reopen, but believes that once EU bailout funds begin flowing "in a matter of weeks", confidence will return.
Although the economy would be badly hit by the economic crisis, Mr Sarris admitted, he maintained that it could benefit from "an energy boom", referring to the exploratory Aphrodite gas fields off the southern coast of the island.Although the economy would be badly hit by the economic crisis, Mr Sarris admitted, he maintained that it could benefit from "an energy boom", referring to the exploratory Aphrodite gas fields off the southern coast of the island.
"Yes, there will be a problem but we will overcome it in a relatively short period of time", he said. He also said his government had renegotiated more favourable loans terms with Russia."Yes, there will be a problem but we will overcome it in a relatively short period of time", he said. He also said his government had renegotiated more favourable loans terms with Russia.
The Cypriot authorities had said all but the biggest two banks would open on Tuesday.The Cypriot authorities had said all but the biggest two banks would open on Tuesday.
Banks have not been open since 15 March. Their reopening had been expected after Cyprus agreed a deal with the International Monetary Fund (IMF) and the European Union (EU) that releases 10bn euros in support.Banks have not been open since 15 March. Their reopening had been expected after Cyprus agreed a deal with the International Monetary Fund (IMF) and the European Union (EU) that releases 10bn euros in support.
It was conditional on Cyprus itself raising 5.8bn euros, most of which looks likely to come from depositors with more than 100,000 euros (£85,000) in Bank of Cyprus and Laiki or Popular Bank.It was conditional on Cyprus itself raising 5.8bn euros, most of which looks likely to come from depositors with more than 100,000 euros (£85,000) in Bank of Cyprus and Laiki or Popular Bank.
The banks remained closed after the country's first money-raising solution, which would have hit smaller deposit holders as well as larger holdings, was rejected by parliament. 'Unique case'
The new deal for Cyprus, unlike previous agreements, does not require parliamentary approval. It will also include austerity measures and tax increases. Members of the European Central Bank (ECB) have been emphasising their view that Cyprus is an isolated case within the eurozone, and that the proposed rescue plan would not be applicable to other eurozone countries.
Laiki will be shut down, and deposits under 100,000 euros, which are guaranteed by the state under EU law, will move into the Bank of Cyprus to create a "good bank". Speaking to reporters at a conference in Prague, Ewald Nowotny, member of the ECB's governing council, said: "Cyprus is a special case. It is no model for other instances" - a view earlier expressed by Benoit Coeure, ECB executive board member.
Deposits above that insured amount will be frozen and used to pay Laiki's debts and recapitalise the Bank of Cyprus, with depositor losses eventually converted into shares. On Monday, Jeroen Dijsselbloem, head of the eurozone's finance ministers, had spooked the markets when he suggested Cyprus's bailout could serve as template for crises elsewhere - comments he later retracted.
Major depositors, many of whom are wealthy Russians, will not be able to access accounts exceeding the 100,000-euro limit until the restructuring of the banks is complete. Many analysts had been concerned that the Cyprus crisis would spread to the wider eurozone had the country been forced to give up the single currency.
'Specific case'
On Monday morning, hopes that the deal would solve the crisis lifted shares.
But later, stock markets were rocked after the head of the Eurogroup of eurozone finance ministers suggested that the deal for Cyprus could form a template for resolving future eurozone banking problems.
Jeroen Dijsselbloem, the Dutch finance minister who as head of the Eurogroup played a key role in the Cyprus negotiations, told Reuters and the Financial Times: "If there is a risk in a bank our first question should be 'OK, what are you in the bank going to do about that?'"
He later added a clarification, saying that Cyprus was "a specific case with exceptional challenges".
Mr Dijsselbloem said the pattern for bank rescues should see shareholders take the first hit, then bondholders, who lend money through financial markets, and only then should depositors with large bank balances be tapped.
The Cyprus deal puts the burden for dealing with problem banks on their shareholders and creditors - in this particular case, customers with large bank balances - rather than the government and taxpayers, or bondholders.
The BBC's Andrew Walker points out that the more common approach to failing banks in the current crisis has been for the state to inject new capital.
He says Cyprus' banks are unusual in that they have relatively few financial market investors who could be tapped.
In the past, nations such as Ireland have pumped billions of taxpayers' money into propping up their banks, rather than risk upsetting large investors and spooking the financial system.
Despite the Cypriot economy's relatively small size, many analysts had been concerned that the crisis would spread to the wider eurozone, had Cyprus been forced to give up the single currency.
There were fears that the country's possible exit from the euro would trigger a loss of confidence across the single currency bloc, and prompt investors to withdraw from other troubled economies, such as Greece.There were fears that the country's possible exit from the euro would trigger a loss of confidence across the single currency bloc, and prompt investors to withdraw from other troubled economies, such as Greece.
However, while Cyprus is now likely to remain in the eurozone, the country still faces significant obstacles as it attempts to recover from the crisis.