Market rally as Cyprus braces for a bitter pill
Investors pushed regional sharemarkets higher on Monday and the euro surged a cent to US130.29¢, buoyed by a radical plan to secure a bailout for Cyprus without imposing losses on people with deposits of less than €100,000. The euro also rose against the Australian dollar, jumping almost a full cent to $1.25.
Hours before a deadline that would have triggered a collapse in the Mediterranean island's financial system, leaders agreed to wind down its second-largest bank and move insured deposits below €100,000 to a "good bank".
In return, the nation will receive an emergency loan of €10 billion from a consortium that includes the International Monetary Fund, the European Union and the European Central Bank.
Under the agreement, Laiki Bank, the nation's second-biggest, will be split into a "good" and "bad" half and gradually wound down. This move will take a hefty toll on bondholders and large deposit holders are tipped to lose €4.2 billion.
Laiki's good half will be merged with the country's biggest lender, Bank of Cyprus. People with uninsured deposits of more than €100,000 in Bank of Cyprus will also face hefty losses believed to be as high as 40 per cent.
Despite the agreement, the cost to deposit holders is likely to deal another blow to investor confidence in the ailing eurozone.
It comes after shareholders in Spain's Bankia - a key lender in the country's own crisis - were told they would be virtually wiped out under a recapitalisation plan announced on the weekend.
Westpac chief currency strategist Robert Rennie said the decision to impose such big losses on people with uninsured deposits in Cyprus - many of whom are rich Russians - could be a worrying precedent.
"You don't have to be a Russian oligarch to have uninsured deposits in European banks," he said.
But IMF head Christine Lagarde said the deal provided "a comprehensive and credible plan" to deal with Cyprus' challenges.
"We believe the plan provides a durable solution to the underlying problems facing Cyprus and places it on a sustainable path to recovery," Ms Lagarde said.
The forced haircut on uninsured deposit holders is a big blow to major investors in Bank of Cyprus - the bank holds the lion's share of the island's Russian deposits.
Westpac also warned that Russia was "hit hard" by the deal.
"Watch for any retaliation, especially aimed at Germany, which has been blamed by Russia for leading the push to hurt depositors in order to limit the size of the European Stability Mechanism loan."
Frequently Asked Questions about this Article…
European leaders agreed a last-minute rescue that split Laiki, Cyprus's second-largest bank, into a 'good' and 'bad' bank, moved insured deposits under €100,000 into the 'good bank', and secured a €10 billion emergency loan from a consortium including the IMF, the EU and the ECB to stabilise the island's financial system.
Insured depositors with less than €100,000 are protected and moved into the 'good bank', but uninsured depositors and bondholders face heavy losses. Large deposit holders are tipped to lose about €4.2 billion overall, and uninsured deposits at Bank of Cyprus could face losses believed to be as high as 40%.
The plan moves safe assets and insured deposits into a 'good' half that will be merged with Bank of Cyprus, while the 'bad' half is wound down. That structure protects some depositors but imposes losses on bondholders and large, uninsured depositors — a key reason investors will be monitoring the fallout closely.
Markets rallied as the deal calmed fears of further eurozone instability. Regional sharemarkets rose and the euro jumped about a cent to roughly US130.29¢ and gained nearly a full cent against the Australian dollar to about $1.25.
While the rescue reduced immediate systemic risk, the forced haircuts on uninsured deposit holders are likely to damage investor confidence in the eurozone. The move sets a precedent for imposing losses on large depositors, which market commentators say could undermine trust in European banks.
Yes. The article notes that shareholders in Spain's Bankia were told they would be virtually wiped out under a recapitalisation plan announced that weekend. It also highlights that Bank of Cyprus holds the lion's share of the island's Russian deposits and that Russia was described as 'hit hard' by the Cyprus deal.
Westpac chief currency strategist Robert Rennie warned that imposing big losses on uninsured depositors could be a worrying precedent, while IMF head Christine Lagarde described the deal as 'a comprehensive and credible plan' that places Cyprus on a sustainable path to recovery.
Investors should watch for further fallout from forced haircuts on uninsured deposits, potential political or economic reactions (the article flags possible retaliation, especially aimed at Germany), and any signs that investor confidence in European banks is weakening. These developments could affect currency and regional market moves.
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