The legislation aims to avoid the disorderly bankruptcy of the bank and to save the state in that scenario from a possible bankruptcy caused by the damage left behind which is estimated to amount to 6.8 billion euro. The bill will automatically shrink the amount that Cyprus needs to recapitalize from 5.8 billion to 3.8 billion
Popular Bank will be split in two, the good and the bad bank.
All guaranteed deposits up to 100,000 euro will be transferred to the Good Bank which will continue regular banking operations and its employees will go to work on Tuesday normally.
The Bad Bank will take up all the non-performing loans and large deposits which cannot be guaranteed. It will then arrange to collect debts, settle with debtors who cannot pay their loans and seek to recover enough funds to satisfy the large depositors. Once this is done the bad bank will be dissolved.
Large deposits will be frozen for a long time – even up to 5 years. Once the assets of the bank (real estate, loans etc) are sold and collected the owners of the deposits will start receiving their money back. Its likely that these depositors will lost up to 50% of their deposits at the end of this process.
Popular Bank shareholders will immediately be at loss as their shares will no longer be valid. The same will happen to people who invested in Popular Bank securities who may or may not eventually be compensated with shares of the newly formed bank.
If the bill is voted down at the parliament, then Popular Bank, the other Cypriot banks and the state will be forced into a disordered bankruptcy. If the bill passes, the losses will be cut at the Popular Bank and all jobs will be secured at least for now. It also ensures 90% of the deposits will be safeguarded.
