Last-Minute Deal : The End of the Cypriot Banking Sector.

Last-Minute Deal : The End of the Cypriot Banking Sector.(Spiegel).By Carsten Volkery. In the end, despite all his pleading, threats and horsetrading, Cypriot President Nicos Anastasiades had no option but to bow to the terms of international lenders. Early on Monday morning, the Euro Group of euro-zone finance ministers agreed a bailout of €10 billion ($13 billion) for the tiny Mediterranean island. In return, the Cypriot government agreed to radically scale down its oversized banking sector. Bank customers with deposits of over €100,000, including wealthy Russians who had deposited funds in Cyprus, will lose a large part of their assets.

The new bailout deal focused on the island's two insolvent major banks. It will wind down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shift deposits below €100,000 to the Bank of Cyprus.

Deposits above €100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and to recapitalise Bank of Cyprus through a deposit/equity conversion.

An initial agreement reached 10 days ago had provoked angry protests in Cyprus and was rejected by the country's parliament because it entailed a levy on all deposits. The plan also led to international criticism because it cast doubt on the EU's deposit guarantee for all assets up to €100,000.

The raid on uninsured Laiki depositors is expected to raise €4.2 billion, Dijsselbloem said.

It's not yet clear how high the losses for deposits exceeding €100,000 will be. That will be decided in the coming weeks by the Cypriot government and the troika of EU, European Central Bank and International Monetary Fund.

The final bailout terms are expected to be agreed by mid-April. Before that, the parliaments of Germany, Finland and the Netherlands will have to give their blessing. Nothing else can block it. The Cypriot parliament can't stop the deal because it has already approved a restructuring of the banks. Read the full story here.


UPDATE: It appears the 'deal' to default/restructure the banks has been designed to bypass the need for parliamentary votes, since it is theoretically not a tax.
While we have little color on what kind of carnage the President of Cyprus had to accept to his fellow countrymen, the news is that :

• CYPRUS, TROIKA REACH AGREEMENT IN PRINCIPLE, EU OFFICIAL SAYS
• DEAL MADE AT DINNER WITH DRAGHI, LAGARDE, VAN ROMPUY, BARROSO

The terms, unsurprisingly what zee Germans wanted, are:
i) Laiki to be wound down;
ii) Bank of Cyprus to survive but with deposit haircuts of up to 40% for the uninsureds, and
iii) deal would see secured deposits in Laiki moved to Bank of Cyprus.
In other words, a deal far worse then the original on proposed by the Eurogroup last week - when the banks still existed. The key appears to be the 'saving' of the insured depositors (crucial to avoid a pan-European bank run) and the crushing of the 'whale' depositors.

Related: Euro Bailouts: Savers Be Warned - Your Money's Not Safe