Largest Depositors in Cypriot Banks to Lose 8.3 Billion Euros in Bail-In

More details of the Cyprus bank bail-in were released early Monday and showed that the largest depositors in Cypriot banks are set to lose an astonishing 8.3 billion euros as part of the deposit levies.

In total, depositors will lose a reported 10.6 billion euros, meaning small depositors, ordinary citizens with average deposit levels, will have to cough up 2.3 billion euros of what were once considered sacred and protected deposits. This number does not include the losses inflicted on investors in the banks.

Also as part of the bail in, investors in the banks will suffer. Investors of all types, from the most junior equity investors through the most senior bondholders and bank creditors, will be wiped out at Laiki Bank, also known as Cyprus Popular Bank. Junior bondholders at the Bank of Cyprus, the largest bank in Cyprus, will also face losses as part of the debt-for-equity bail in for the troubled lender.

Notably, these numbers are only for the two banks and do not include the other banks in Cyprus, although those banks are mostly smaller. Recall, as part of the bailout, Laiki Bank will be wound down and its insured deposits will be transferred to the Bank of Cyprus before Laiki is wound down in the nation's good bank/bad bank plan.

The financial sector restructuring is part of Cyprus' agreed-upon bailout from the Troika of lenders comprised of the International Monetary Fund (IMF), European Central Bank (ECB), and European Union (EU). The 10 billion euro loan, to be repaid over three years, is necessary for the island nation as it would be unable to pay its debts without the loans.

"The bail-in of uninsured depositors of Laiki and Bank of Cyprus will provide an estimated contribution to recapitalization of 8.3 billion euros," the document, dated April 12 and marked "final" said. In a footnote, it added: "This is a maximum estimate. The final amount will depend inter alia on the conversion under the debt-for-equity swap in Bank of Cyprus and the recoveries of Laiki Bank."

Of the 10 billion euros in loans, the IMF would contribute 1 billion euros with the rest coming through the European Stability Mechanism from both the EU and the ECB. 2.5 billion euros of the total is earmarked for recapitalizing banks while 4.1 billion euros will be used for redeeming government debt and 3.4 billion euros to cover general government expenses.

The Cypriot banking sector got into trouble mainly because it lost 4 billion euros, or 22 percent of Cypriot GDP, on the restructuring of Greek sovereign debt last year. The losses were actually a condition of the second bailout for Greece and facilitated the recent events after Russia failed to extend a bridge loan to Cyprus' banks.

The euro traded lower at 1.3081 at 12:15 pm in New York after most major stock indices in Europe closed lower by about 0.5 percent.