Cyprus, EU and IMF have agreed on a bailout plan for the island state's ailing financial institutions. Bankruptcy seems off the the table but many of the large investors will have to swallow hefty losses.
It wasn't just a long night of negotiations, but days of nerve-wrecking back and forth. Yet in the end, it seemed everyone was at least somewhat content - even Cypriot Finance Minister Michalis Sarris.
"We have achieved the best possible outcome under the circumstances. It's not that we have won a battle but we really have avoided a disastrous exit from the eurozone," he said.
Should the long night of marathon talks have failed to deliver a breakthrough, both Cyprus and its banks would have been threatened with imminent bankruptcy. The European Central Bank had said earlier that its emergency help to Cypriot banks to ensure their liquidity would only be provided until Monday (25.3.2013).
EU deposit guarantee stands
The plan includes a major clean-up of the country's highly indebted financial sector, a measure which is hoped to rake in several billion euros in Cypriot contributions to the rescue package. With Nicosia thus doing its part, the EU will give 10 billion euros in fresh loans to the little island state.
Cyprus' second largest financial institution, Laiki Bank, is to be broken up. Toxic assets are to be moved to a so-called bad bank. The rest is to be transferred to the country's largest bank, the Bank of Cyprus - which itself is in deep financial trouble.
All deposits of more than 100,000 euros are to be temporarily frozen. The holders will have to contribute to the bailout package, though the size of that contribution still remains to be negotiated. They may have to relinquish as much as 40 percent of their savings.
What was important to the eurozone was that savings of less than 100,000 euros would not be affected in order to demonstrate that the EU will stand by its deposit guarantee for smaller account holders.
Earlier plans on how to bail out Cyprus had planned for all account holders to shoulder part of the burden - a plan that had caused outrage in Cyprus and concerns over the reliability of the bloc's deposit guarantee in the rest of Europe.
Shrinking the financial sector
German Finance Minister Wolfgang Schäuble was satisfied "that we now have achieved what all along had been our position:" Namely that the financial burden would partly be shouldered by investors and account holders and that it would lead to shrinking the country's financial sector down to a healthy size.
Before Sunday night's breakthrough, Cyprus had wanted to avoid forcing investors to contribute at all as Nicosia was worried this would tarnish the country's attractiveness as an international financial center.
In the end though, the new deal is not that different from what had been agreed between Cyprus and the eurogroup more than a week earlier.
Eurogroup chief Jeroen Dijsselbloem even admitted that the instruments now chosen could also been in place a week ago, though he added that politically the current deal would not have been possible back then.
"Now we have the better solution in worse circumstances I am sorry to say," he conceded. Better in the sense as it now directly targets the banks involved.
A difficult future
But a lot of trust has been lost in the meantime. EU Economic Affairs Commissioner Olli Rehn himself had been barely optimistic ahead of the talks, saying that good opportunities had passed and that now there were only tough measures left.
"The near future will be very difficult for the country and its people," Rehn said.
German Chancellor Angela Merkel has borne the brunt of the blame for the looming bankruptcy and has been the target of vitriolic attacks by angry Cypriot protesters. French Finance Minister Pierre Moscovici likened the Cypriot banking sector to a gambling hall and his German counterpart Schäuble said it was well known that he wouldn't be "blackmailed" into anything.
Ahead of the talks there'd been a creeping sense that the eurozone partners were increasingly considering just letting Cyprus fail and default. At least, for now, this threat is off the table.
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