The news from Cyprus remains sketchy, but as part of a €17bn bailout of the tiny east Mediterranean country, it seems that ordinary depositors in its banks are to lose part of their deposits whilst senior bondholders will walk away with 100% repayment. “Pari passu”, the infuriating Latin expression meaning “ranking the same” that has been used in the past to advertise that depositors would be treated the same as bondholders seems to have been “non gradus anus rodentum” or “not worth a rat’s ass”. Most of the Irish media seems mostly to have started St Patrick’s Day celebrations early and this is really just too heavy for them, so let’s see if we can fill the gap.
It seems the €17bn bailout of Cyprus is akin to the €85bn bailout of Ireland. In our case, we contributed €17.5bn of our own funds from our national rainy day fund, the National Pension Reserve Fund, to the bailout. The contribution from the IMF, EU and bilateral loans came to €67.5bn. In the case of Cyprus, the Cypriots are contributing €5.8bn from the burning of depositors in their banks. Yes, depositors! There is now word whatsoever about any other contribution to the bailout, for example, from bondholders.
So if you’re a Cypriot depositor, you’ll lose 6.75% of your deposits below €100,000 and 9.9% of your deposits over €100,000. Banks in Cyprus are closed until Tuesday – they have a holiday, Green Monday on 18th March 2013 – and the haircuts will be imposed then. There are bars on electronic transfers between now and then, and queues of depositors outside banks usually open on Saturdays have this morning been disappointed and angered to be met with closed branches. To sweeten the deal, depositors will be given shares in the banks equivalent to their losses – at least there are debt for equity swaps in some banks in Europe!
There will also be a €1.4bn privatization programme, and a condition of the bailout is that Cyprus raise its corporate tax rate from 10% to 12.5%, the same headline rate as pertains in Ireland. The €10bn international component of the €17bn bailout will be coming from Europe.
You’ll find the latest European Commission forecasts for Cyprus here. In short its economy is contracting, unemployment is reaching our levels, its debt to GDP is just 90% but is rising. Its GDP is about €18bn and it has a population of just 1m.
UPDATE: 16th March, 2013. A statement has been issued by the EuroGroup of 17 EuroZone finance ministers which welcomes the Cyprus bailout. It doesn’t give very much detail but refers to the “bail in of junior bondholders”. There is no mention whatsoever of senior bondholders. In Ireland, burned €14bn from the €26bn of junior bondholders that were repaid. However, apart from a tiny number of senior bondholders at IBRC who face a haircut after the liquidation, the others have been repaid 100%.