The following unprecedented decision was taken by Eurogroup in dealing with the recapitalisation of the two largest banks in Cyprus:
1. For Bank of Cyprus, all credit balances greater than the guaranteed threshold of €100.000, will be converted into shares to the extent required for the bank to reach a Tier 1 capital of 9%. The exact amount of the contribution cannot be determined at this stage although media reports place this figure at 35%. All credit balances below €100.000 remain unaffected.
2. Laiki Bank will be restructured into a “good” and “bad” bank where all credit balances up to €100.000 will be transferred to the good bank along with performing loans. The “bad” bank will receive all credit balances in excess of €100.000 and non performing loans. The deposits allocated to the bad bank will remain frozen until the bank achieves collection of loans and realisation of assets so as to partially pay back the depositors.
It should be noted that the remaining banks in Cyprus, numbering almost 40, including branches of overseas banks, have not been affected.
The decisions of the Eurogroup have been strongly criticised, amongst others, by certain EU and third countries, financial publications, Nobel winning economists, depositors of all sizes and the international financial and banking sectors.
In the short term, the financial services sector in Cyprus is expected to be severely affected by the Eurogroup decision. However, the mass exodus of clients and investors predicted, and we say hoped for by many, has not occurred.
This is principally due to the fact that Cyprus was and remains a jurisdiction offering significant benefits in international business structures. The high calibre of professionals in the legal, tax and financial services, its business friendly legal system and together with an infrastructure designed to support the establishment of international companies was why Cyprus was considered the automatic choice for many international business structures. These factors remain as relevant as ever today and there is no practical reason why Cyprus should not continue to be the preferred choice for many international business structures.
The tax exemption on dividends, capital gains on shares and other financial instruments, permanent establishment profits, IP profits and interest earned by non- residents are not affected. It is not obligatory for a Cyprus company to maintain bank accounts in Cyprus, indeed most Cyprus companies used in holding structures do not. Cyprus continues to be an advantageous holding company jurisdiction.
As we are informed by many of our own international clients, “it is business as usual” for them.
Background
The two aforementioned banks suffered severe losses and asset write downs as a result of the Greek financial crisis, particularly the the Greek debt write off imposed by the Eurogroup in 2011.
The losses suffered by the two banks as a result of this “haircut” are estimated at almost 5 billion euros (equal to the same amount that the restructuring of the two banks will inflict on the depositors). In effect, the Eurogroup’s controversial solution of the write-off of Greek debt has lead to the write-off of Cypriot deposits, in order to recover the losses created by the former.
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Theodorou Law Firm is a Cyprus law firm with Cyprus lawyers and other legal experts on legal matters involving Cyprus law, EU law and international law. The above should be used as a source of general information only. It is not intended to give a definitive statement of the law.
