A deal has finally been reached. Form of the agreement is hard to figure out. Most articles don’t outline the details.
I finally found an article that gave a good explanation – Scratch one stupid idea at the Financial Times Alphaville blog. (free registration required)
Here is my very short summary:
The second largest bank (Laiki) will be liquidated.
- Insured deposits and good assets (‘good bank’ idea) will be moved to the largest bank (Bank of Cyprus).
- Equity positions and bondholders get wiped out.
- Uninsured depositors have their money frozen until the bank can be liquidated.
- What uninsured depositors get will depend on what can be realized in the liquidation.
The largest bank (Bank of Cyprus) will survive after restructuring.
- It will get the good assets and insured deposits of Laiki.
- Equity and bondholder positions get wiped out.
- Uninsured deposits will be frozen. Some of those positions will be converted to equity. They will take a serious haircut.
- The amount of hit to the uninsured depositors won’t be know until the large bank is restructured and the second largest is fully liquidated.
Insured deposits, at both those two banks and the rest of the banking system will be protected.
Speculation in news reports today for the haircut to uninsured deposits at the two banks range from 30% to 40%.
The end result, such as we can see at this point:
- the equity and bondholder positions in the two banks are gone,
- insured depositors come out whole, and
- uninsured depositors take a serious loss.
All of those outcomes are good in my opinion.
What’s bad in my opinion is that the Cypriot and European officials pondered for a long time how much of the insured deposits they would expropriate. That they eventually decided that they would unilaterally take 0% of the insured deposits does not reduce the damage caused by their pondering.
Tyler Cowen has a great overview at Marginal Revolution – What to look for in the Cyprus deal.
There are a number of other articles out today, but none of them really helped me, so I won’t list them.