For the past two weeks, all eyes were focused on Cyprus and its bailout with the Troika of creditors made up of the European Union, the European Central Bank, and the International Monetary Fund.

However, as part of the deal, Piraeus Bank, a Greek bank, has agreed to purchase the Greek operations of Cyprus' three largest banks as the Cypriot banks are wound down.

Tuesday, Piraeus and Popular Bank of Cyprus, also known as Laiki Bank, the Bank of Cyprus and Hellenic Bank reached an agreement which will see Piraeus purchase the Greek operations of the three Cypriot banks for a mere 524 million euros. The new Piraeus will now have total assets of 95 billion euros with over 1,660 branches and 24,000 employees, making it the second-largest Greek bank.

“Piraeus Bank signed an agreement today to acquire all of the Greek deposits, loans and branches of Bank of Cyprus, Cyprus Popular Bank (CPB) and Hellenic Bank, including loans and deposits of their Greek subsidiaries (leasing, factoring and the Investment Bank of Greece (IBG)), for a total cash consideration of €524mn,” the Greek lender said in a statement.

The bank added further, “the transaction ensures the stability of the Greek banking system, provides assistance to Cyprus in relation to the resolution of the crisis and secures depositors, customers and employees of the three Cypriot banks in Greece post recent uncertainty."

By swallowing up the Greek deposits of Cypriot banks, Greece has somewhat successfully distanced itself from Cyprus. A large reason Cyprus' banking sector was failing was due to its exposure to Greek government bonds during Greece's debt restructuring. Hopefully, the move by Piraeus and international creditors will help to shield Greece from contagion risk from Cyprus and ensure it stays on the route to recovery.

Fears over contagion from Cyprus have spread quickly due to the size of its banking sector relative to its economy. Although the economy is small, its banking sector is estimated to be some 7 to 8 times the size of its economy, meaning that the entire Cypriot economy is over-dependent on the banking sector.

U.K. Chancellor of the Exchequer George Osborne spoke Tuesday on these very fears. Cyprus Popular Bank has operations in the U.K. and Osborne said that the government was "working on a solution for the U.K. branch of Cyprus Popular Bank." Most likely, the U.K. operations of Cyprus Popular Bank will be wound down and bought by a healthier bank in the U.K.

The Bank of Cyprus also has U.K. operations, as noted on its website, and it would be logical to expect these operations to be wound down as well as part of a de-leveraging program for the Cypriot banking sector. In addition, the three Cypriot banks have operations in nations including Russia, the Ukraine and South Africa.

In sum, expect to see announcements in the near future similar to this one, of foreign banks purchasing the assets of Cypriot banks outside of Cyprus. This will aid in making the de-leveraging of Cyprus' banking sector as smooth and easy as possible, although it will be painful nonetheless.

(c) 2013 Benzinga does not provide investment advice. All rights reserved.


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