The more sizable haircut, coming soon after the imposition of tough capital controls, is the latest and perhaps most profound reminder of the financial punishment being visited upon this small island economy as it struggles to comply with the conditions that Europe is demanding of it before it gets a desperately needed 10-billion euro loan.
Europe has demanded that large depositors in the countrys two largest banks Bank of Cyprus and Laiki Bankaccept across-the-board losses in order to pay for the $ 17-billion bailout.
Over the past week, government officials have been saying that depositor losses would not exceed 40%even though bankers and lawyers involved in the negotiations have been warning for some time that the final figure would need to be higher if the bank was to re emerge as a viable entity. Under the terms of the transaction, large depositors would have 77.5% of their savings turned into different forms of equity, with the rest remaining as a frozen, non-interest-bearing deposit that they would be able to access in the future.
If the bank does well, depositors would be able to sell their stock. But even in the best case, in which the bank thrives on the back of a quickly recovering economy the loss is likely to exceed 60% and could well be much more than that.