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International lenders agreed to a €10bn bailout of Cyprus
early on Saturday morning after 10 hours of fraught negotiations, which included convincing Nicosia to seize €5.8bn from Cypriot bank deposits to help pay for the rescue, a first for any eurozone bailout.
The cash from Cypriot account holders will come in the form of a one-time 9.9 per cent levy on all deposits over €100,000 that will be slashed from their savings before banks reopen Tuesday, a day after a Cypriot holiday. An additional 6.75 per cent levy will be imposed on deposits below that level.
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Cypriot finance minister Michalis Sarris said his government had already moved to ensure deposit holders could not make large withdrawals electronically before Tuesday’s open; Jörg Asmussen, a member of the European Central Bank executive board, said a portion of deposits equivalent to the levies would likely be frozen immediately.
“I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” Mr Sarris said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”
While the levies fell short of the full-scale “bail-in” of all deposits larger than €100,000 that had been advocated by some bailout lenders, particularly the International Monetary Fund, it was still sweeping in its scale and unprecedented in the three-year-old crisis.
, whose banking sector was about as large relative to its economy as Cyprus’ when it was forced into a bailout in 2010, never considered such a measure. Cyprus becomes the fourth eurozone country to receive a sovereign bailout after Greece, Ireland and Portugal. Spain has also required €40bn in EU aid to shore up its teetering banking system.
Officials who had resisted imposing losses on bank accounts, which included leaders in the European Commission and the Cypriot government, had feared forcing losses on ordinary deposit holders could spur panicked withdrawals
in Cyprus and, potentially, in other eurozone countries with shaky financial sectors, like Spain.
Mr Asmussen said the Cypriot government and the ECB were closely monitoring deposit flows, including on an intraday basis, for signs of a bank run and insisted those with accounts in other bailout countries need not fear for their holdings since the rescue programmes are already fully funded and would not need to dip into deposits for more cash. The eurozone has said it is prepared to spend up to €100bn to recapitalise Spanish banks, for example.
Mr Asmussen justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue.
One senior EU official involved in the talks said Mr Asmussen was crucial to securing the deal, which at several points during the night appeared close to collapse. “Without Jörg, we would have no deal,” said the official. “He was excellent in and out of the meeting.”
Cypriots hit by the levy will be granted shares in their banks of equivalent value to their losses, something Mr Sarris said he believed would give depositors an incentive to stay put.
Much like they did one year ago when eurozone leaders forced losses on private holders of Greek sovereign bonds, officials Saturday morning insisted the Cypriot banking sector was unique and required drastic action.
While Jeroen Dijsselbloem, the Dutch finance minister who chairs the group of eurozone finance ministers that hashed out the deal in all-night talks, declined to categorically rule out hitting depositors in future bank bailouts, he insisted that it was not being currently considered for any other country.
“The challenges we were facing in Cyprus were of an exceptional nature,” Mr Dijsselbloem said. “Therefore, unique measures were determined to be necessary.”
Without the losses imposed on Cypriot depositors, the bailout would have been close to €17bn, about the size of the entire Cypriot economy. The IMF insisted such a programme – which would have increased Cyprus’ sovereign debt to 145 per cent of economic output – would overburden Nicosia and hinted it would not participate in the rescue unless its size was reduced.
Christine Lagarde, the IMF managing director who participated in the marathon talks, said she would now recommend to the fund’s board that it contribute to the programme, though she said it was too early to say whether it would chip in one-third of the cost as it has in Ireland, Portugal and the first Greek bailout.
Other measures to bring the cost of the bailout down to €10bn include a €1.4bn privatisation programme and an agreement to raise Cyprus’ corporate tax rate from 10 per cent to 12.5 per cent, Cypriot officials said. Mr Asmussen said the measures put Nicosia on a path where its debt is projected to come down to 100 per cent of gross domestic product by 2020.
Olli Rehn, the European Commission economic chief, said he had been in contact with Russian finance ministry officials who indicated they were willing to ease the conditions of a €2.5bn rescue loan made to Cyprus two years ago when the government first found itself unable to raise money in the bond market. A lengthening of the repayment schedule and reduction in interest rates would also help lower the bailout’s cost. Mr Sarris is due to travel to Moscow for talks next week, Cypriot officials said.
The two largest Cypriot banks – Bank of Cyprus and Laiki Bank – also have considerable operations in Greece, but Mr Asmussen said Greek depositors would not be hit. Instead, those branches would be “ring fenced” and sold off to a Greek bank at a later date.
What does the bail out mean for UK depositors?
By Patrick Jenkins, Banking Editor
Customers of the UK units of Cyprus’s banks probably have nothing to worry about, according to people close to the situation.
The British subsidiary of Bank of Cyprus said depositors’ money would be unaffected by the haircut being applied to accounts operated by its parent company. Subsidiary structures, which hold ringfenced capital and funding and are more tightly supervised by local regulators, offer greater legal protection in this kind of incidence.
It is less clear whether UK customers of the other main Cypriot bank, Laiki – formerly known as Marfin – will be similarly protected. Laiki operates as a branch in the UK, rather than a segregated subsidiary. However, people close to the situation suggested it, too, was confident that customers in the UK would not be hit by the haircut decision.