Cyprus to Shrink Banking Sector, Levy 40% Tax on Uninsured Deposits

Nigel Thomas
25 Mar, 2013
New York City

Cyprus struck a late night deal in Brussels with European lender that will effectively shrink its banking sector and shift the cost of bailout to larger uninsured depositors and close its second largest banks.

[R]4:00 PM Frankfurt – Cyprus struck a late night deal in Brussels with European lender that will effectively shrink its banking sector and shift the cost of bailout to larger uninsured depositors and close its second largest banks.[/R]

European markets extended gains after a late night deal between Cyprus and European lenders averted a collapse of the banking system in the island nation.

Dutch Finance Minister Jeroen Dijsselbloem said that the deal with Cyprus should be seen as a template for the rest of the euro zone and nations with large banking industries must look to restructure and shrink the industry. The news was first reported by Reuters.

The final deal structured under the exiting banking framework does not require approval of the Cypriot Parliament.

Cyprus will close its second largest bank Popular Bank PCL and merge insured accounts with less than 100,000 euros with the largest bank Bank of Cyprus.

Accounts with more than 100,000 euros that are not insured by the European Union may face as much as 40% tax according to European regulators.

The second largest bank, also known as Laiki will be closed down and eliminate all jobs and senior bond holders in the bank will be forced to take losses on their holdings.

Cyprus will be responsible to raise 5.8 billion euros in capital to contribute to the total bank bailout of 10 billion euros.

European finance ministers quickly approved the deal.

In London trading, FTSE 100 index rose 0.6% or 35.5 to 6,428 and in Frankfurt the DAX index gained 0.5% to 42.6 to 7,954.

In Paris, CAC 40 index added 0.5% or 18.8 to 3,789.

The benchmark bond yield rose six basis points to 4.57% and Spanish bond yield rose 10 points to 4.82%.

Spain is scheduled to release its budget deficit data tomorrow and in the following days the data on inflation, retail sales and mortgage loans.

The central government’s deficit in Spain increased 35% from a year ago in January and total public debt surged 20% last year to reach 84.1% of gross domestic output.

Stock Movers

Metso Oyj soared 11% after the Finland based engineering group said it is planning to spin off its paper, pulp and power unit to revive business growth by separating its businesses.

Vodafone gained in London trading on 3-times its daily average trading volume on persistent rumors that the UK based telecom group is looking to sell to its partner Verizon Wireless or its parent Verizon.