The Eurogroup and the Cypriot authorities reach an agreement for the financial aid programme application

The agreement reached in Brussels by the Eurogroup and the Cypriot authorities includes the necessary elements for the implementation of the future macroeconomic adjustment plan. The agreement will involve the immediate resolution of the second largest bank in Cyprus, the Laiki Bank, as well as the restructuring of the Bank of Cyprus. All insured depositors in all banks will be fully protected in accordance with the relevant EU

The agreement reached by the Eurogroup and the Cypriot authorities is supported by all euro area Member States as well as by the three institutions. The approved programme aims to address the current imbalances within the Cypriot financial system by downsizing it, so that in 2018 the domestic banking sector will reach the EU average. In addition, the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatisation. The agreement ensures that all deposits below 100.000 euro will be safeguarded in accordance with EU principles as early requested by the Eurogroup.

The financial aid granted to Cyprus will represent the agreed 1 billion euro and will be subject to the application of harsh economic measures. Among these measures, the agreement provides for the resolution of the second entity in the country, the Laiki Bank, whose assets will be divided into a good bank and a bad bank. The good bank will be integrated into the Bank of Cyprus. Only uninsured deposits at the Bank of Cyprus will be frozen until the recapitalization is effective. The bad bank will be run down, although the remission of debt has not yet been established.

The Bank of Cyprus will have to reduce its size and be recapitalized by a deposit and equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders. This conversion will be performed so that it will ensure a capital ration of 9% by the end of the programme. The Bank of Cyprus also assume the 9 billion euros of debt the Laiki Bank has with the European Central Bank.

The Eurogroup expects the governing council of the European Stability Mechanism to formally approve the proposal for financial assistance in the third week of April 2013, pending the completion of the approval mechanisms at the national level.