Cyprus Crisis in 2013 - We Understand the Role Crise in Cyprus

MARCH 25, 2013

SPECIAL COMMENT

Credit Negative Consequences of the Cyprus Crisis

From Credit Outlook

Table of Contents: CYPRUS CRISIS IS CREDIT NEGATIVE FOR ALL EURO AREA SOVEREIGNS WILLINGNESS TO BAIL-IN CYPRIOT BANK DEPOSITORS IS CREDIT NEGATIVE FOR EURO AREA BANKS CYPRUS REMAINS AT RISK OF DEFAULT AND EXIT FROM THE EURO AREA EVEN IF IT RESOLVES THE CURRENT CRISIS CYPRUS’ CRISIS WILL FUNDAMENTALLY RESHAPE ITS BANKING SYSTEM ECB’S ROLE IS VITAL TO CONTAINING FALLOUT FROM A EURO AREA EXIT 2

Over the weekend, officials from Cyprus (Caa3 negative) remained locked in negotiations with euro area officials attempting to hammer out a financial support program for Cyprus and its ailing banking system. This followed a busy week on several fronts. On 19 March, Cyprus’ parliament rejected the original €10 billion financial assistance package agreed to with the Troika the weekend before, which involved a onetime “financial stability levy” on deposits in Cypriot banks. On 21 March, the Troika rejected a Cyprus-proposed “Plan B” for its €5.8 billion contribution to the support package. Then on the same day, the ECB said that Cypriot banks would no longer have access to the Emergency Liquidity Assistance (ELA) facility starting 25 March unless an acceptable bailout agreement was in place. Withdrawal of ELA would precipitate the collapse of the Cypriot banking system and is likely to result in Cyprus exiting the euro area. In this compendium, reflecting what we knew Sunday night, we focus on the negative credit implications of the negotiations, the proposals and the ensuing events for: » » » » Euro area sovereigns Euro area banks Cyprus Cypriot banks

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A final article examines the policy tools available to euro area policymakers to contain financial market disruption in the wake of the Cyprus crisis.

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