The Cyprus Solidarity Fund and bank restructuring - what's the latest?

Is this Plan B or Plan C? We’ve lost track. Maybe Plan B+.

Anyway, it seems that the Cypriot parliament is currently discussing the proposal for a ‘solidarity fund’ which the cabinet has reportedly unanimously approved. This idea originated yesterday and was rejected by the troika overnight – we assume (hope) that this version of the fund contains some additional proposals to smooth over the previous disagreements.

What is the solidarity fund and what does it include (click to enlarge)?

The solidarity fund is essentially an investment fund or sovereign wealth fund which will pool a series of assets to help provide the €5.8bn in cash required by the Cypriot government to agree the bailout.

This is a broad list (we have assessed many of the measures already) and not all of them are likely to be included.

Now, clearly, some of these assets are liquid and can provide a cash flow, while others are not. It has been suggested that this fund will be used to purchase government debt in order to fully monetise the assets and boost government coffers. This seems strange to us since it would only succeed in worsening Cyprus’ debt level. It is also very likely to be rejected by the Troika for just that reason.

We also don’t necessarily see the benefit of extending the Russian loan. It helps from a cash flow sense, interest payments are cut by 2.5% and repayment is delayed by five years. But in the end Cyprus will end up paying €160m more. The Troika usually frowns on this type of approach.

CDU MP Hans Michelbach has also raised questions over the fund and specifically suggested it falls around €1bn short of providing the €5.8bn needed.

Laiki bank restructuring

The Cypriot Central Bank just announced that the second largest bank in Cyprus, Laiki Bank (or Cyprus Popular Bank), will be restructured and separated into a good and bad bank. This had been rumoured throughout the afternoon and sparked long queues at cash machines particularly Laiki ones, while the protests outside the Cypriot parliament have swelled with nervous Laiki bank workers and customers. The level of withdrawals has also been restricted to €260, while (somewhat ironically) the Central Bank has confirmed all depositors up to €100,000 will be guaranteed - no word on those above (see below).

This seems a reasonable move and could save between €1bn and €2bn on bank recap costs but problems abound. The cost of financing and winding down the bad bank will be large, who will finance it? Some reports suggest it could be the uninsured depositors – this may work but is likely to cause outcry amongst foreign investors and some Cypriot businesses.

The bill on bank restructuring is in front of the parliament now, along with a bill on the solidarity fund and a bill which includes some form of capital controls. It seems that the restructuring bill and the capital controls bill has support from the eurozone, but it is not clear that the solidarity fund does or the plans to fund the bank recap (as @SpiegelPeter notes).

The eurogroup will hold a call on this proposal at 6pm GMT, with a statement due after.

It is not clear if a vote will take place on it tonight in the Cypriot parliament, but we imagine they will at least need to wait for approval of the eurogroup.