International lenders agreed to a €10bn bailout of Cyprus early Saturday morning after 10 hours of negotiations, but the deal came only after convincing Nicosia to force depositors in Cypriot banks to contribute €5.8bn to the rescue, a first for any eurozone bailout.
The payment by Cypriot depositors 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 holdings when banks reopen Tuesday, a day after a Cypriot holiday; deposits below that level will be hit by a separate 6.75 per cent levy.
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 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.
Even Ireland, 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.
Those who had resisted imposing losses on bank accounts, which included 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 intra-day basis, and insisted those with bank accounts in other countries receiving bailout aid need not fear for their holdings since the rescue programmes are already fully funded an would not need to dip into deposits for more money. 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 would shoulder the burden of the bailout. Without the measures, he said, much of it would be shouldered by Cypriots; by going after 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 Joroen Djisselbloem, the Dutch foreign 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 Djisselbloem 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 wither it would chip in one-third of the cost as it had 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 Cyrpus' 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.
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.
more at http://www.euro2day.gr/ftcom_en/126/articles/764156/ArticleFTen.aspx
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