Asta Pravilonytė

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Monday, 25 March 2013

 

Is €10 billion a sufficient amount to support financial sector of Cyprus?

 

The Central Bank of Cyprus announced that the Eurogroup Agreement on Cyprus was reached on 25 March 2013. According to the press release of the Central Bank of Cyprus, the Bank of Cyprus will be restructured and fully capitalised by acquiring performing loans, other assets and the insured deposits of the disorderly defaulted Laiki Bank. The Laiki Bank Group pursued restructuring plan which has been approved by the Central Bank of Cyprus; however, reported interim consolidated financial statements of the Laiki Bank Group for the nine months ended 30 September 2012 revealed loss of €1,67 billion, decline in total assets to €30,37 billion and deterioration of customer deposits to €17,86 billion. So, is financial assistance of €10 billion negotiated with the Eurogroup a huge or a small amount for Cyprus?

The Eurogroup Statement on Cyprus released on 25 March 2013 states that Laiki will be resolved with a full contribution of equity shareholders, bond holders and uninsured deposits’ conversion to equity in such a way that a capital ratio of 9 % was secured by the end of the programme. The bailout amount of €10 billion will be used to safeguard all deposits below €100000; however, money of agreed financial assistance will not be used for the recapitalisation of Laiki Bank and Bank of Cyprus. Thus, is €10 billion a sufficient amount to strengthen financial sector?

Most likely, the majority would respond that the sufficient amount of the bailout depends on the scope of possible damages to the economy, the degree of dissatisfaction of the depositors and investors, and undermined confidence in the financial markets. However, uninsured deposits’ conversion to equity, according to the agreed programme, should not be treated as depositors’ loss. It is an exchange of assets to ensure financial stability by sufficient capital requirements. Consequently, strong financial sector is not defined by the amount of money. It is rather a result of the successfully allocated financial assets.

So, the answer whether €10 billion is a huge or a small amount of money could be measured by the time and efforts required to make it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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