UBS: Cyprus bail-out deal: no winners emerging

Cyprus bail-out deal: no winners
emerging
• Eurogroup finance ministers, the IMF, the ECB and the Cypriot
government agreed on a bail-out plan. The private sector
contribution will be taken from depositors in the country's two
largest banks, while deposits below EUR 100,000 are being
protected and other banks will not face a deposit levy.
• Potential capital flight can be addressed by maintaining a regulatory
limit on deposit withdrawals, which effectively resembles capital
controls.
• We think only very little financial assistance will come from Russia
and we explain why today's value of the gas reserves is way too low
to solve the current issues.
• From a strategic angle, the outcome for Cyprus is in line with our
expectations and we see no need to adapt our current positioning.
The resolution of this risk should support risky assets in the nearterm.

The 25 March deal aims to close the curtain on a political farce acted out by
the Cypriot government that swung back and forth between its 15 March
agreements with the Eurogroup including a bank deposit tax, a political
mind shift on 18 March after facing public outcry, inconclusive negotiations
with Russia until 20 March about gas exploration rights and bank stakes,
the setup of a national solidarity fund jeopardizing workers' pension funds
on 21 March and finally a new agreement with the Troika on 23 March,
including (again) a cut on bank deposits. However, as initially demanded by
many EU finance ministers, deposit amounts below EUR 100,000, which
are covered by national deposit insurance within the EU, will now remain
protected. Major changes to the initial plan are that most of Cyprus Popular
Bank, the second largest bank, will be wound down and only deposits
below EUR 100,000 will stay with the surviving "good" bank. Bank of
Cyprus, the largest bank, will survive, but needs to apply a large deposit
haircut on amounts above EUR 100,000 to fund its own recapitalization. No
additional vote by the Cypriot parliament is required and the memorandum
of understanding is planned to be signed by the second week of April.

Cornerstones of the bail-out plan
• Cyprus receives a EUR 10bn support loan
program from the Eurogroup
• Cyprus Popular Bank (Laiki) will be split-up, with
bad assets and deposits above EUR 100,000
going into a bad bank that will be wound down,
leading to sizeable losses for depositors.
• Deposits at Bank of Cyprus greater than EUR
100,000 will be bailed-in by a deposit-to-equity
swap to ensure the recapitalization of the bank
to a Core Tier 1 ratio of 9%
• Other banks will not face a deposit levy and will
be supported by the government as part of the
EUR 10bn package
• Insured deposits below EUR 100,000 will be
protected against losses
Source: UBS
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