Cyprus haircut

The Cyprus haircut refers to the March 2013 bail-in arrangement that resolved a banking crisis in Cyprus by imposing losses on uninsured depositors at the country's two largest lenders, Bank of Cyprus and Cyprus Popular Bank (Laiki). It was the first time in the eurozone that bank depositors—rather than only bondholders or taxpayers—were forced to absorb losses as a condition of an international rescue.

Cypriot banks had grown to roughly seven to eight times the size of national GDP and were heavily exposed to Greek sovereign debt, which itself had been restructured in 2012. When Cyprus sought assistance from the Troika (the European Commission, European Central Bank, and International Monetary Fund), the initial March 16, 2013 proposal would have levied all deposits, including those under the €100,000 deposit-guarantee threshold. That plan was rejected by the Cypriot parliament after public outrage and bank runs, prompting an extended bank holiday and the imposition of capital controls—another eurozone first.

The revised deal, agreed on March 25, 2013, provided €10 billion in Troika financing in exchange for:

• Resolution of Laiki Bank, with insured deposits transferred to Bank of Cyprus and uninsured deposits largely wiped out.
• A conversion of uninsured deposits (above €100,000) at Bank of Cyprus into equity, ultimately costing large depositors roughly 47.5% of balances above the guarantee threshold.
• Protection of all insured deposits under €100,000, consistent with EU deposit-guarantee rules.

The episode is widely seen as a precedent for the EU's Bank Recovery and Resolution Directive (BRRD), adopted in 2014, which formalized bail-in as the default tool for failing banks across the bloc. It also strained relations with Russia, whose nationals held significant deposits in Cypriot banks, and prompted lasting debate about moral hazard, depositor confidence, and the credibility of eurozone deposit insurance before the later push for a European Deposit Insurance Scheme (EDIS).