Government Bails Out Laiki, Bank of Cyprus

Update: The government has bailed out Laiki Bank and Bank of Cyprus by buying shares worth 1.8 billion euros in Laiki and 592 million in Bank of Cyprus.

Both companies lost billions on their exposure to the Greek debt market amid a parallel slowdown in the Cyprus economy. The government is now the major shareholder in Laiki, with an 85 percent stake. According to sources in both banks, the actual cash for the shares will not be received until after a bailout from the EU/IMF/ECB Troika.

"The Government of Cyprus remains firmly committed to ensure the stability of the financial sector and will work in close cooperation with the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) in the framework of an international assistance programme," it said in a statement.

The decision comes amid a visit from the Troika, from which Cyprus has requested a rescue package of its own. The IMF will analyse the banks' situation and after negotiations between the government and the Troika, the final figure that will be lent to the state by the European Financial Stability Fund (EFSF) will be announced. Teams of specialists are visiting the island's finance ministry and central bank to go through the public sector's books.

An EU/IMF bailout will mean cutbacks in the financial sector and government sector, said the Eurogroup in an earlier statement.

The state's debt is now estimated to rise to 85 percent of GDP, further weakening the long-term sustainability of public finances at a time when Cyprus has limited access to international borrowing markets, according to previous statements from the European Commission. 

The government deficit is set to narrow to 3.4 percent of GDP in 2012 and 2.5 percent of GDP in 2013, according to the Commission's Spring Forecast. This is higher than projections from the finance ministry which see a deficit of under three percent this year.

The island's GDP is projected to contract by 0.8 percent in 2012 due to the fall in domestic demand and persistent financial market uncertainty, said the Commission. Private consumption will be restrained by the squeeze in disposable income, mainly among public sector employees and by the rise in unemployment to unprecedented levels, it said.

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