After refusing the first deal that imposed a 7.75 per cent tax on all depositors, the country finally settled on a programme that spares deposits below €100,000 (£85,500). The country's second-largest bank, Laiki Bank, will be closed and its deposits over the agreed sum will be placed in a bad bank, similar to that of Spain. These deposits total around €4.2 billion and may be wiped out entirely.
Smaller deposits at Laiki will be transferred to the Bank of Cyprus and all lenders to the closed bank will see their deposits wiped. However, the central bank will not go untouched and will be subject to huge restructuring, but no bailout money will be used to recapitalise it. Instead, shareholders and bondholders will face losses, as will depositors with over €100,000 at the bank.
This spells bad news for Cypriot property, bringing further instability to the sector at a time when prices are already falling. While there is no doubt investors can now obtain real estate at pleasingly low prices, many may not want to take the risk associated with entering a financially volatile country.
Problems associated with implementing financial reforms in Cyprus have already been identified. The Guardian reported that getting the Bank of Cyprus up to healthy EU-mandated capital levels will be difficult because it will inherit the €9 billion debt Laiki had with the European Central Bank. Strict controls on money transfers will also be needed throughout the country's financial system, which will have a considerable impact on the Cypriot economy.
Experts predict that the economy may contract by ten per cent or more over the coming years, the Wall Street Journal reported. This is made worse by the already vulnerable position of the country.Consequently, domestic and international property demand may be considerably constrained in the near-term.