Follow-up: Further Program Notes for the Cyprus Banking Drama

Last Friday I sketched out some program notes for the Cyprus banking crisis. The notes explained the origin of the banks’ losses (Act 1) and the tools that regulators could choose from to resolve the crisis (Act 2). Now the curtain has gone up on Act 3. The government of Cyprus and the EU-ECB-IMF “Troika” have agreed on a resolution plan. By and large, it uses the familiar building blocks of past systemic bank restructurings, but it puts them together in some unusual ways. Here is a brief outline, based on numerous press reports circulating this morning:

Act 3, Scene 1: Liquidation of Laiki Bank

The country’s second largest bank, Laiki Bank, will be liquidated. Deposits over €100,000 will be transferred to a “bad bank” along with the bank’s portfolio of toxic assets, which include large amounts of Greek government bonds and nonperforming real estate loans. Shareholders of the bank will be wiped out, along with both senior and junior unsecured creditors. The large deposits will be frozen for the time being.>>>Read more