Cyprus Eases Capital Controls, Seeks Better Bailout Terms

  on April 02 2013 12:47 PM
Cyprus
Cyprus' financial sector accounted for nearly 10 percent of its GDP in 2012. REUTERS

Cyprus partially curbed capital controls on Tuesday, marginally freeing up the movement of money within the country. Capital flows were restricted on March 28, following a two-week bank closure that was the result of bailout negotiations involving the nation’s top two banks.

After sending a few shock waves through financial markets around the world, Cyprus reached a bailout agreement with the Troika worth 10 billion euros ($12.8 billion). As initially proposed, the terms of this deal called for a 6.7 percent charge against deposits of less than 100,000 euros, and a 9.9 percent charge against deposits over that amount. Unsurprisingly, Cypriot policymakers shot the proposal down in a landslide vote.

After the Troika’s proposal was swept off the table, the European Central Bank let Cyprus know that the decision left the ball in its court. The ECB gave the nation just a few days to put some sort of official bankruptcy plan into motion or it would withdraw emergency liquidity assistance to the nation’s banking sector, which was (and still is, really) sitting with both feet over the edge of collapse.

Pressed for time and unable to charge small depositors, Cypriot leaders and international creditors worked out an alternative proposal. The nation’s second-largest bank would be closed and viable assets would be transferred to the nation’s largest bank. Deposits of more than 100,000 euros will be charged as much as 60 percent, and senior bondholders will also likely take losses. All in all, still highly shocking and economically disruptive.

Throughout this, Cypriot banks remained closed and tight capital controls were put in place to prevent a bank run and to ensure that taxable deposits remained in Cyprus. The nation’s government has said that the controls could remain in effect for as long as a month. The deal struck on Tuesday unfroze about 10 percent of the remaining 40 percent of unsecured deposits, which incurred losses related the bailout.

With this said and done, Cyprus is looking to ease the other terms of its bailout package. According to Bloomberg, government spokesman Christos Stylianides said that Cyprus has until 2017 to pay back the 10 billion euros and secure a primary budget surplus, which excludes interest, and is seeking an additional year for repayment.

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