UPDATE 1-Cyprus and EU/IMF agree draft proposal to rescue banks

Sun Mar 24, 2013 8:26pm EDT

BRUSSELS, March 25 (Reuters) - Cyprus, the European Union and the International Monetary Fund have agreed a new plan to try to resolve the island's shattered banks and finance a rescue of the country, EU officials said early on Monday.

The proposal, which will now be put to euro zone finance ministers for approval, will involve setting up a "good bank" and a "bad bank".

It will mean that Popular Bank of Cyprus, the island's second largest bank which is also known as Laiki, will effectively be shut down.

Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus, the country's largest bank. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debts. It remains unclear how large the writedown on those funds will be.

No charges will be incurred against any Cypriot bank account with less than 100,000 euros in them, the officials said.

Finance ministers were expected to examine the agreement in detail, but one official said he did not think the outlines of the agreement would change in any significant way.

"It should be fairly easy for finance ministers to agree to this," he said. "We have been in close contact with all relevant euro zone countries during this negotiation process and there is broad agreement."

The plan is likely to mean very heavy losses for uninsured deposits in Laiki, which has suffered since writing down the value of its holdings of Greek government bonds last year.

Around 35 billion euros is held in Cypriot accounts with more than 100,000 euros in them, but it is not clear how much of that total is held in Laiki bank.

If sufficient funds can be found in Laiki to pay off debt and restructure the Cypriot banking sector, uninsured depositors in Bank of Cyprus may not incur any losses, although that remains to be seen.

One of the officials said shareholders and bondholders in Bank of Cyprus would be part of the "bail-in", with those investors receiving equity in the bank in exchange.

One potential complication that will have to be resolved concerns the provision of emergency liquidity assistance (ELA) to both banks by the European Central Bank.

Laiki bank has received 9 billion euros of ELA, all of which will be transferred to Bank of Cyprus under the rescue plan.

Bank of Cyprus has already received 1 billion euros worth of ELA assistance from the ECB. By taking on Laiki's obligations, it will now have outstanding assistance of 10 billion, which sources indicate is close to the ECB's acceptable threshold.

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