- Andreas Neocleous & Co LLC has been closely following recent developments in the Eurozone, which result from the impact of the Greek financial crisis on Cyprus's banking sector. With large holdings of Greek public and private sector debt and significant operations in Greece, the principal Cyprus banks suffered severe losses and asset writedowns as a result of the Greek financial crisis, particularly the "haircut" imposed by the Eurogroup in 2011. The Cyprus government was forced to underwrite a capital issue by one of the banks, which made the public finances unsustainable. In the summer of 2012 the government of the day applied for support from the European Financial Stability Facility and the European Stability Mechanism.
- For a variety of reasons the application had not been resolved by the time of the February 2013 presidential elections and the new government appointed in March made this a priority. An initial political agreement was reached with the Eurogroup of finance ministers on 16 March which included a so-called solidarity levy or "bail-in" of bank depositors, which was to apply without exception to all deposits held with credit institutions in Cyprus, including the Cyprus branches and subsidiaries of overseas banks. At the insistence of the Cyprus representatives this levy was subject to the approval of parliament.
- In order to ensure the stability of the banking system the European Central Bank issued an order on the same day temporarily suspending all banking transactions in Cyprus, including internet banking facilities. This suspension remains in force for the time being. The Central Bank of Cyprus also declared bank holidays, meaning that banks in Cyprus have remained closed since 15 March.
- On 19 March the Cyprus Parliament rejected the "bail-in" proposal without a single vote being cast in favour of it. Since then discussions and negotiations have continued between the Cyprus government and regulatory authorities on the one hand and the "troika" (the European Commission, the European Central Bank and the International Monetary Fund) representing the potential providers of financial support on the other. In addition, negotiations took place with the Russian government regarding possible financial assistance but these were inconclusive.
- On 24 March the Cyprus government presented its new proposals
to the "troika" ahead of the Eurogroup meeting which was
scheduled to take place later that day. Following protracted
negotiations a new political agreement was reached with the
Eurogroup on a general framework of financial support for Cyprus.
The main points of the agreement are as follows:
- Cyprus Popular Bank, commonly known as Laiki Bank, will immediately enter into a resolution process and will be restructured into a "bad" bank and a "good" bank. All unimpaired assets will be transferred to the "good" bank, together with all customer credit balances of less than €100,000 and the first €100,000 of larger balances. For larger balances, the first €100,000 will be transferred to the "good" bank and any excess will remain frozen in the "bad" bank, along with all non-performing assets. Following realisation of those assets depositors should receive a partial payment on their frozen deposit.
- The Laiki "good" bank will be merged with Bank of Cyprus to create a new bank.
- Bank of Cyprus customers' credit balances of less than €100,000 and the first €100,000 of larger credit balances will be unaffected. A proportion of any excess over €100,000 will be converted into shares in the new bank so as to achieve a capital ratio of 9 per cent. The required proportion will only be determined as the process progresses – preliminary estimates are in the order of 40 per cent. - It is not clear when the cut-off date for determination of deposits will be. We should expect it to be 15 March, when accounts were initially frozen, with funds credited to accounts after that date being freely available, subject to any restrictions on capital movements as described in the next paragraph. However, there has been no official announcement on this.
- On 23 March 2013, the Cyprus parliament enacted a law empowering the government to impose restrictions on capital movements on individuals and businesses operating accounts with credit institutions in Cyprus. These restrictions may be activated by the relevant authorities only "in cases of emergency and following consultation with the relevant European Authorities and the International Monetary Fund ("IMF").
- Following the agreement, banks in Cyprus are now expected to reopen on 28 March.
- The Eurogroup statement summarising the main terms of the agreement can be found at http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/136487.pdf
- With its decision, the Eurogroup has also stated that it is convinced that this solution is the best way forward for ensuring the overall viability and stability of the Cyprus financial system and the Cyprus economy.
- It is important to note that the decisions of the Eurogroup affect only the holders of deposits with the two banks concerned, namely Laiki Bank and Bank of Cyprus. They do not directly affect any Cyprus corporate and trust structures, nor do they detract from the favourable Cyprus holding company regime and the advantages offered by other Cyprus structures, since there is no requirement for Cyprus companies, entities or trusts to open or maintain bank accounts in Cyprus. Given the possibility of introduction of capital controls it would be prudent to review banking arrangements in order to minimise the risk of any adverse effect.
- The proposed increase in Cyprus's corporate tax rate from 10 per cent to 12.5 per cent which has been agreed with the Eurogroup should not materially affect most holding companies, and the other benefits of the Cyprus holding company regime such as the tax free flow of dividends through Cyprus and the beneficial exit opportunities offered by Cyprus's favourable national tax legislation and wide network of double tax treaties remain intact.
- We are closely monitoring the situation and we will keep you informed of developments as we become aware of them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
