The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.
Swiftly endorsed by euro zone finance ministers, the plan will spare the Mediterranean island a financial meltdown by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a "good bank".
Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalize Bank of Cyprus through a deposit/equity conversion.
The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.
Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.
So, goodbye to the island's number 2 bank, and at least a 30% haircut through "unwinding" of Laiki on big Russian whale accounts, a clever maneuver that's not exactly a tax...oh yeah, and the loss of maybe half a percent of the nation's total jobs. We'll see who signs off on the deal in the rest of Europe, because this deal is being done as a "bank restructuring" which the Cypriot parliament has already approved, they can't vote on this and sink it again. Now, the rest of the EU however does have to sign off, and that's expected to happen. After all, they're not going to burn over this, just Cyprus and Russia.
The Russians, I expect, will arrive for their payback quite soon. Meanwhile, expect Cyprus to slip into a full-blown depression, as the Offshore Money Laundering industry was the island's major industry. With that dead, yearly GDP contraction in the double digits isn't out of the question. Big time depression coming here. The real losers are the Cypriots themselves, who I expect will be in the riot stage before the end of the year, if not the end of spring.
Gotta love austerity. In the end, the little people always pay.