BRUSSELS — Cash-strapped Cyprus secured a €10 billion ($13 billion) bailout package from its European partners and the International Monetary Fund in a bid to prevent the island nation from entering a bankruptcy that could rekindle the region's debt crisis, officials said early Saturday.
In a major departure from
established policies, the package foresees a one-time levy on the money
held in bank accounts in Cyprus. Analysts have warned that making
depositors take a hit threatens to undermine investors’ confidence in
other weaker eurozone economies and might possibly lead to bank runs.
In
return for the rescue loans, Cyprus will trim its deficit,
significantly shrink its troubled banking sector, raise taxes and
privatize state assets, said the Netherlands’ Jeroen Dijsselbloem,
president of the Eurogroup meetings of the 17-nation eurozone’s finance
ministers.
“The assistance is warranted to safeguard financial
stability in Cyprus and the eurozone as a whole,” he said, briefing
reporters after almost 10 hours of negotiations.
People with less
than €100,000 in their Cypriot bank accounts will have to pay a one-time
tax of 6.75 percent, those owning more money will lose 9.9 percent. The
measure will be carried out early next week and is expected to net €5.8
billion in additional revenues, Dijsselbloem added, thereby greatly
reducing the country’s financing need.
“We found it justified in
terms of burden sharing to also involve the depositors,” said
Dijsselbloem, noting that it was a “unique measure” because of Cyprus’
outsized banking system.
“As it is a contribution to the financial
stability of Cyprus, it seems just to ask a contribution of all deposit
holders,” Dijsselbloem added.
Analysts have warned that imposing
such a drastic measure could be seen as a watershed moment, undermining
the eurozone’s credibility. Although the leaders stressed the levy was a
unique measure for Cyprus, they said the same when private holders of
government bonds were forced to accept losses in Greece.
The
measure therefore risks scaring investors in Europe’s weaker economies,
which could lead them to move their deposits to more stable eurozone
countries like Germany. In that case, banks in southern Europe’s
economies might be considerably weakened and could possibly require new
bailouts. That could then weaken the respective governments, which might
then need further assistance from their eurozone partners — possibly
setting off a vicious spiral.
But Joerg Asmussen, a member of the
European Central Bank’s governing council, sought to dismiss fears of
bank troubles stemming from the levy, saying the ECB stands ready to
provide financial institutions with emergency liquidity assistance.
“The
levy, it’s an appropriate tool. It’s really tailor-made to the
situation in Cyprus,” he said. “It’s a country in extreme financing
need, and what you do is to expand the tax base, not only to residents
but also to non-residents,” he said.
Russian citizens are estimated to have at least €20 billion in deposits in Cyprus.
Asmussen
stressed that there was no risk of such a levy being implemented in
other countries that have already received bailouts, such as Greece,
Ireland or Portugal, because those countries’ financing needs are
covered by their international rescue loans.
In a sign of how
exceptional and urgent a decision the one-time levy is, Cypriot banks
are already implementing measures to make sure that depositors cannot
withdraw money to shrink the tax basis, Asmussen said. The remainder of
their holdings can be withdrawn, he added.
But Cypriot Finance
Minister Michalis Sarris added that electronic bank transfers won’t be
possible before Tuesday, Monday being a regular holiday in the country.
In return for their one-time tax payment, depositors will get an
equivalent stake in the bank where they have their account, he said.
“It
was a very difficult decision,” Sarris acknowledged, but added that
“much more money could have been lost in a bankruptcy of the banking
system or indeed the country.”
Cypriot lawmakers are expected to
approve a law on the bank levy over the weekend, and the money will be
levied starting Tuesday.
“I want to underscore that this is a once
and for all levy. We wanted to do it in a way, in a decisive way … to
remove any doubt about the future,” Sarris said. “There is no reason
whatsoever that deposit holders in Cyprus, existing and new ones, should
have any concerns.”
While the Cypriot bailout is many times
smaller than Greece’s €240 billion package or Ireland’s €67.5 billion,
it is still considered crucial to the future of the eurozone because a
default even by a small country could roil financial markets and
undermine investor confidence.
Cyprus’ financing needs to
recapitalize its banks and keep the government afloat were initially
estimated to total €17 billion, which is almost the equivalent of
Cyprus’ annual economic output and would have ballooned the country’s
public debt to about 140 percent of its economy, a level the IMF
considers unsustainable.
The creditors therefore sought to exhaust
all avenues to have Cyprus raise more revenue to reduce the need for
external financing.
Losses will also be imposed on the banks’
junior bondholders, the officials said. In addition, Cyprus agreed to
increase its capital gains tax, and to raise its corporate tax by a
quarter, from 10 to 25 percent, Dijsselbloem said.
To further
reduce the financing needs, Russia was expected to significantly extend
the maturity of a €2.5 billion loan granted in 2011 after the country
could no longer tap international markets.
The ministers also
agreed to make sizeable Greek operations of the country’s two largest
banks, Bank of Cyprus and Laiki, eligible for spare rescue cash from
Greece’s bailout accord.
Under the bailout deal, Cyprus debt is forecast to reach about 100% of GDP by 2020.
The
economy of Cyprus, an eastern Mediterranean island of just over a
million people, represents less than 0.2 percent of the eurozone’s
annual economic output.
Cyprus, which first applied for a bailout
last summer, wasn’t in imminent danger of bankruptcy, as it faces its
next bond redemption in June. But the European Central Bank, concerned
that prolonged uncertainty over Cyprus could hurt market sentiment
across the eurozone, had pushed for a swift deal, even threatening to
cut the country’s financial system off from emergency funding.
The
finance ministers’ agreement still has to be approved by parliaments in
several eurozone nations. EU officials say everything should be done by
the end of the month.
To appease its potential rescue creditors,
Cyprus has already accepted an independent audit of its banks, which
hold billions in Russian deposits, to soothe concerns voiced by Germany,
France and others that they launder dirty Russian money.
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Don Melvin in Brussels contributed to this report.
