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Euro Zone Agrees to 10 Billion Euro Bailout for Cyprus
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Published: Saturday, 16 Mar 2013 | 11:25 AM ET
Georges Gobet | AFP | Getty Images
International Monetary Fund Managing Director Christine Lagarde (C) and Cypriot Finance Minister Michael Sarris (R) arrive prior to a Eurozone meeting on March 15, 2013 at the EU Headquarters in Brussels.
The euro zone struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risks of a wider bank run.
The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region's debt crisis.
In a radical departure from previous aid packages—and one that gave rise to incredulity and anger across the country—euro zone finance ministers forced Cyprus' savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.
Almost half of its depositors are believed to be non-resident Russians, but most of those queuing on Saturday at automatic teller machines to pull out cash appeared to be Cypriots.
"I wish I was not the minister to do this," Cypriot Finance Minister Michael Sarris said after 10 hours of late-night talks where euro zone finance ministers agreed the package.
"Much more money could have been lost in a bankruptcy of the banking system or indeed of the country," he said, adding that he hoped a levy and bailout would mark a new start for Cyprus.
Without a rescue, Cyprus would default and threaten to unravel investor confidence in the euro zone that has been fostered by the European Central Bank's promise last year to do whatever it takes to shore up the currency bloc.
The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks that were hit by a sovereign debt restructuring in Greece.
The deposit levy - set at 9.9 percent on bank deposits exceeding 100,000 euros and at 6.7 percent on anything below that - will take force on Tuesday after a bank holiday on Monday.
'Theft, Pure and Simple'
To guard against capital flight, Cyprus will take immediate steps to prevent electronic money transfers over the weekend.
In the coastal town of Larnaca, where irate depositors queued early to withdraw money from cash machines, co-op credit societies that are normally open on Saturdays stayed closed.
But on the Mediterranean island, initial incredulity at the decision gave way to anger.
Co-op credit societies, normally open on Saturdays, were shut for business in the coastal town of Larnaca as depositors started queuing early in the morning to withdraw their cash.
"I'm extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans," said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.
"They call Sicily the island of the mafia. It's not Sicily, it's Cyprus. This is theft, pure and simple," said a pensioner.
The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks that were hit by a sovereign debt restructuring in Greece.
The levy on bank deposits will come into force on Tuesday, after a bank holiday on Monday. Cyprus will take immediate steps to prevent electronic money transfers over the weekend.
"As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders," Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting in Brussels, told reporters.
Such levies break the taboo of hitting bank depositors with losses, but Dijsselbloem said it would not have otherwise been possible to salvage its financial sector, which is around eight times the size of the economy.
"We are not penalizing Cyprus... we are dealing with the problems in Cyprus," Dijsselbloem said.
The island's bailout had repeatedly been delayed amid concerns from other EU states that its close business relations with Russia, and a banking system flush with Russian cash, made it a conduit for money-laundering.
Dijsselbloem said that under the program, the island's debt would fall to 100 percent of economic output by 2020.
In return for emergency loans, Cyprus agreed to increase its corporate tax rate by 2.5 percentage points to 12.5 percent. This should boost Cypriot revenues, limiting the size of the loan needed from the euro zone and keep down public debt.
Cypriot President Nicos Anastasiades called a meeting of party leaders for Saturday night to brief them on the bailout. |
