Learn › Economic history › The Eurozone Crisis — 2009 to 2015

The Eurozone Crisis — 2009 to 2015

The Cyprus Bail-In of 2013

Explain why Cyprus could not rescue its banks itself, who paid for their losses and how, and what the rescue programme brought.

Before you start

What you'll be able to answer

  1. Why could Cyprus not rescue its own banks?
  2. Who paid for the banks' losses, and how did the bail-in work?
  3. What did the rescue programme bring Cyprus?

Where this sits

The Eurozone Crisis — 2009 to 2015 · this module is lit

  1. 21 Oct 2009Greece revises its 2009 deficit figure sharply upward
  2. May 2010Euro area governments and the IMF agree Greece's first rescue loan, EU governments agree to create rescue funds, and the ECB starts buying government bonds
  3. 28 Nov 2010Ireland agrees a rescue programme
  4. May 2011Portugal agrees a rescue programme
  5. Dec 2011 and Feb 2012The ECB makes two rounds of three-year loans to banks
  6. Mar to Apr 2012Private holders of Greek bonds take a cut of more than half in face value
  7. 20 Jul 2012Euro area ministers approve a loan to rebuild the capital of Spain's banks
  8. 26 Jul and 6 Sep 2012The ECB's president promises "whatever it takes"; the ECB announces a plan to buy struggling governments' bonds
  9. Mar to Apr 2013Cyprus takes rescue loans, while uninsured depositors, shareholders and bondholders meet the capital needs of Cyprus Popular Bank and the Bank of Cyprus
  10. Jun to Jul 2015Greece shuts its banks as savers rush to withdraw money, voters reject the lenders' terms, and euro area leaders agree to move towards a third programme

15 March 2013

On 15 March 2013 Cyprus's finance minister, Michael Sarris, went into a meeting of the finance ministers of the euro area, the countries that share the euro. Cyprus had asked them for help almost nine months before. Its two largest banks were short of capital, the owners' money that absorbs a bank's losses, and the European Central Bank (ECB), the central bank for the euro area, was ready to cut off the emergency loans keeping them open. "We really had no negotiating power and no credibility," Sarris said later.

Predict first

Bonds are IOUs that governments and firms sell to investors. What do you think had left Cyprus's two largest banks short of capital?

Cyprus's banks grew far larger than its economy

Cyprus joined the euro in 2008. Its banks grew fast by taking in deposits, many of them from abroad: at the end of 2012 about 30 per cent of all deposits in Cyprus came from outside the euro area, the European Commission, the EU's executive, reported. The banks held loans and other assets worth about six and a half times Cyprus's yearly output, its GDP, according to the history of the European Stability Mechanism (ESM), the euro area's permanent rescue fund.

A bank's capital is the money its owners, the shareholders, have put in, and it takes losses first. When losses use up its capital, a bank cannot carry on unless someone puts in more, or some of what it owes is cancelled.

Losses abroad and at home, 2012

Cypriot banks held many Greek government bonds. When private holders of those bonds took a cut in 2012, the banks lost more than 4 billion euros, over 22 per cent of Cyprus's GDP, the ESM's history says. Many loans in Cyprus were going bad as well.

Cyprus Popular Bank, known as Laiki, could not find investors to put in new capital, so in June 2012 the government bought its new shares for 1.8 billion euros and took 84 per cent of the bank. The government itself could no longer borrow for long periods from investors, and that month it asked euro area governments and the International Monetary Fund (IMF), which lends to countries in trouble, for a programme, a loan on conditions.