As you have figured out by now, eurocrisis deals must occur in the wee hours of the morning before European markets open. This gives the parties the maximum amount of time to play Machiavellian brinkmanship games in addition to making the eventual movie about the eurocrisis more dramatic.
This is the deal. In exchange for €10bn in loans from the troika, Cyprus will restructure its two largest and weakest banks. Deposits under €100k will be placed into the Bank of Cyprus with the amount over the threshold moved into Laiki bank. Bank of Cyprus will serve as the starter for a new, good bank, while Laiki will serve as the core of the bad bank.
All bad loans will be moved to Laiki with good loans moved to Bank of Cyprus. Excess deposits will fund the resolution of the new bad bank with depositors receiving equity. These depositors will receive some money in the future as the bad bank is wound down. Bondholders also will be impaired and receive equity in exchange.
Cyprus will be subject to capital controls for the time being to limit the run on its banks. Depositors will face restrictions in withdrawing and transferring funds. The exact type and the duration of these restrictions has not yet been disseminated to the public.
The Eurozone survives another day, but at what cost? These are the consequences of this bailout.
Unsustainable Debt Load. Not only will Cyprus’ debt balloon to nearly 120% of GDP, it will be unable to service this debt in the immediate future as its largest industry is pared down over the next few years. Cyprus is a small country with limited domestic industry. Like Greece, it will be hard-pressed to increase its exports, and a strong euro does not help. The facts and figures are here:
Crisis Fighting Precedent. Cyprus’ treatment by the Germans shows stakeholders in the periphery the treatment to expect if a bailout is required. Even though small depositors get to keep their money, it will be subject to capital controls indefinitely. With banks paying practically zero interest, people are better off keeping their money in a mattress.
Democracy. People throughout the periphery cannot help noticing that the Cypriot Parliament was bypassed in making this deal. Doing “whatever it takes” includes subverting the democratic process. This may actually soothe investors in periphery debt, but at what price?