Late Sunday night the president of Cyprus, Nicos Anastasiades, was officially informed of the deal the unelected Eurogroup had come up with in order for Cyprus to receive its bailout from the European Central Bank. Anastasiades flew to Brussels on Sunday to meet with Mario Draghi, the president of the European Central Bank (ECB), Christine Lagarde, the managing director of the International Monetary Fund (IMF), and Jos Barroso, the president of the European Commission (EC). The meeting was run by Herman Van Rompuy, the president of the European Council. On his way to the meeting, Anastasiades admitted that u201Cthe situation is very difficult.u201D
That was an understatement. Once the details were explained to Anastasiades, the Eurogroup – consisting of unelected finance ministers from each country that uses the euro, and headed by another unelected bureaucrat, Jeroen Dijsselbloem – issued a statement of unanimity:
The Eurogroup has reached an agreement with the Cypriot authorities on the key elements necessary for a future macroeconomic adjustment program. This agreement is supported by all euro area Member States as well as the three institutions.
The details were ugly. There will first of all be a u201Cdownsizing of the [country's] financial sectoru201D by theft of part of every account over roughly $130,000 (u20AC100,000) in Cyprus' two largest banks, the Bank of Cyprus and the Cyprus Popular Bank (the Laiki Bank), which hold half of all bank deposits in the country. Any amount above $130,000 will make a u201Ccontributionu201D to the deal amounting to an estimated 20 percent while those accounts held in Cyprus' other 26 banks will be nicked four percent. The Cyprus Popular Bank will be liquidated and accounts $130,000 or smaller will be transferred to the Bank of Cyprus. Accounts over $130,000 will disappear along with any investors' bonds in that bank. The country's capital gains tax rate will be increased along with corporate income tax rates.
Said u201Cdownsizingu201D was exacerbated by Anastasiades telling his friends what was coming on Thursday and to get their money out before the deal was announced. According to the Daily Mail, within the next 48 hours some $6 billion of foreign deposits (estimated to be between $20 and $40 billion) was transferred out of the country, leaving a banking system weakened by haircuts already suffered due to the Greek financial crisis teetering on the edge.
Anticipating that once the banks were opened small depositors would be taking their money out as well, the deal kept the remaining banks closed indefinitely, limiting depositors just $130 maximum daily withdrawals from their accounts through ATM machines.
And a new term was introduced into the lexicon of the day: u201Cbail-in.” A bail-in occurs when the contract terms of a bond are unilaterally and illegally changed by an outside illegal and unelected body so that the bond holder who normally would stand at the head of the line in a bankruptcy gets to u201Ccontributeu201D part of his investment to save the bank in which he invested. In essence it's a forced haircut.
The statement was full of praise for the willingness of the Cyprus government and its president to go along with the ultimatum: u201CTogether with the decisions taken by Cyprus, this results in a fully financed program which will allow Cyprus' public debt to remain on a sustainable path.u201D