Laiki (Popular) Bank will be liquidated and depositors with more than €100,000, equity holders and junior and senior bank holders all face big losses. The extent of these losses is not yet known, and will depend on the value of bad assets that will be transferred from the bank’s balance sheet.
Smaller depositors will be spared, as money is transferred to the Bank of Cyprus which will continue to have ECB liquidity support. Uninsured depositors in the Bank of Cyprus will see a deposit/equity conversion in order to achieve a 9% capital ratio by the end of the programme. Details remain scant, but it is likely to require the freezing of uninsured deposits and capital controls.
Willem Verhagen, Chief Economist at ING Investment Management, said: “The fact that depositors below €100,000 were protected is certainly a positive and should give some reassurance to small deposit holders in other EMU countries. From a long-term perspective, the fact that creditor bail-in is the first port of call rather than a bail-out by tax payers will improve the stability of the financial system as diminishes moral hazard issues and gives lenders more incentives to exercise due dilligence."
Implications elsewhere
However, Verhagen went on to say that the prospect of private sector bail-in may cause depositors to move away from other nations with oversized banking sectors, and that Eurozone fragmentation has increased once again over the past two weeks.
William Sels, UK head of investment strategy at HSBC Private Bank, said fears were overblown, however: "Markets are relieved that a deal has been reached which allows the ECB to continue to provide assistance and avoids a collapse of the entire banking sector in the country. The prospect of a Eurozone exit, which some commentators were worried about but seemed remote to us, has faded again.
"Although Cyprus is a first on many fronts – capital controls, losses on senior debt holders and uninsured deposits – we think markets will be willing to consider this as a special situation. We expect some limited capital and deposit flight from the periphery, but contagion should remain limited.
"The handling of the deal has been messier than expected, but one more potential stumbling block for markets is now behind us. This, in our view, should support riskier assets and our overweight of equities."
