Some Savers in Cyprus May Lose 60 Percent

LONDON — Big-ticket savers at the Bank of Cyprus may be forced to accept losses on their deposits that exceed 60 percent in order to keep the stricken bank afloat, bankers briefed on the negotiations said on Friday.

The more sizable haircut, coming soon after the imposition of tough capital controls, is the latest and perhaps most profound reminder of the financial punishment being visited upon this small island economy as it struggles to comply with the conditions that Europe is demanding of it before it gets a desperately needed 10 billion euro loan.

Europe has demanded that large depositors in the country’s two largest banks — Bank of Cyprus and Laiki Bank — accept across-the-board losses in order to pay for the 17 billion bailout.

Over the past week, government officials have been saying that depositor losses would not exceed 40 percent — even though bankers and lawyers involved in the negotiations have been warning for some time that the final figure would need to be higher if the bank was to re emerge as a viable entity.

Under the terms of the transaction, large depositors would have 77.5 percent of their savings turned into different forms of equity, with the rest remaining as a frozen, non-interest-bearing deposit that they would be able to access in the future.

If the bank does well, depositors would be able to sell their stock. But even in the best case, in which the bank thrives on the back of a quickly recovering economy — a long shot most economists believe — the loss is likely to exceed 60 percent and could well be much more than that.

Lawyers and bankers who have analyzed the transaction believe the ultimate loss to the depositor could be anywhere between 60 and 77.5 percent.

There has been no official announcement of the deal and, given the political sensitivities involved, there could be further changes in the coming days. But news of the terms is already rocketing through Cyprus.

How much of a loss uninsured depositors with accounts of more than 100,000 euros at the bank would have to bear has become a hotly disputed topic in the past two weeks, pitting Cyprus’s creditors — the European Commission, the European Central Bank and in particular the International Monetary Fund, known widely as the troika — against the Cyprus government.

In the past week, as it has become evident that the country’s 18-billion-euro economy was going to enter a tailspin after the controversial move to impose capital controls and freeze bank deposits equal to one half the size of the country’s economic output, it has become increasingly clear that the bank would need a much larger capital cushion if it is to survive the next year.

Projections of an economic slump of 3 percent that were once seen as a worst case now seem wildly optimistic, with most economists expecting the economy to plunge between 5 and 10 percent this year.

While many of the Bank of Cyprus’ largest depositors are wealthy Russians, numerous Cypriot businesses and wealthy individuals also had significant amounts of capital in the bank. Economists believe that wiping out such a large amount of savings will be devastating — not just on the economy but on Cyprus’s future as a center for financial services.

Article source: http://www.nytimes.com/2013/03/30/business/global/some-savers-in-cyprus-may-lose-60-percent.html?partner=rss&emc=rss