The Cyprus bailout dominated the news against this past week, keeping currency markets on edge and weighed on the euro as investors feared contagion to the rest of the region.
Euro zone finance ministers at second Eurogroup meeting last week revised the terms of the rescue package after the parliament in Cyprus rejected the first proposal which included a haircut on bank deposits under 100,000 euros.
In order for Cyprus to receive a 10 billion euro rescue package from international lenders known as the “troika” (European Union, European Central Bank and International Monetary Fund), needs to raise 5.8 billion euros to receive this financial aid.
Cyprus banks that had been closed for two weeks reopened on Thursday.
The central bank of Cyprus said the news terms for the bailout mean that accounts at the country’s largest bank, the Bank of Cyprus, with deposits of more than 100,000 euros, which are uninsured, will receive a 37.5 percent haircut, and converted into a class of bank shares
The Bank of Cyprus will freeze another 22.5 percent in each of the accounts until the Cyprus’s bailout terms have been met. The money will be placed in a fund that won’t earn interest, and it could see another haircut if needed.
The remaining 40 percent of bank deposits will earn interest but these funds will be temporarily frozen for liquidity purposes.
Meanwhile, also part of the bailout agreement, Cyprus’ second-largest bank, Popular Bank of Cyprus, (also known as Laiki Bank), will be split into a “good” bank and “bad” bank as insured deposits from the good bank will be folded into the Bank of Cyprus, and the bad bank will be wound down over time.