A radical new
option for the financial rescue of
Cyprus would force losses on uninsured depositors in Cypriot banks, as well
as investors in the country’s sovereign bonds, according to a confidential
memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.
The proposal for a
“bail-in” of investors and depositors, and drastic shrinking of the Cypriot
banking sector, is one of three options put forward as alternatives to a
full-scale bailout. The ministers are trying to agree a rescue plan by March,
to follow the presidential elections in Cyprus later this month.
The new plan has
not been endorsed by its authors in the European Commission or by individual
eurozone members. The memo warns that “the risks associated with this option
are significant”, including a renewed danger of contagion in eurozone financial
markets, and premature collapse in the Cypriot banking sector.
The radical
proposal is intended to produce a more sustainable debt solution for the country,
cutting the size of Cyprus’s bailout by two-thirds – from €16.7bn to only
€5.5bn – by involving more foreign depositors and bond holders.
It would reduce
Cyprus’s outstanding debt to just 77 per cent of economic output, compared with
140 per cent in the current full bailout plan.
By “bailing in”
uninsured bank depositors, it would also involve more foreign investors, especially from Russia, some of whom
have used Cyprus as a tax haven in recent years. That would answer criticism
from Berlin in particular, where politicians are calling for more drastic
action to stop the island being used for money laundering and tax
evasion.
Senior EU
officials who have seen the document cautioned that imposing losses on bank
depositors and a sovereign debt restructuring remain unlikely. Underlining the
dissuasive language in the memo, they said that bailing in depositors was never
considered in previous eurozone bailouts because of concern that it could lead
to bank runs in other financially fragile countries.
But the document
also makes clear that both options remain on the table despite public
insistence by eurozone leaders that Greece was “unique”
and would be the only country to default on sovereign debts.
Labelled “strictly
confidential” and distributed to eurozone officials last week, the memo says
the radical version of the plan – including a “haircut” of 50 per cent on
sovereign bonds – would shrink the Cypriot financial sector, now nearly eight
times larger than the island’s economy, by about one-third by 2015.
But the authors
warn such drastic action could restart contagion in eurozone financial markets,
and put forward two more cautious alternatives.
One more moderate
“bail-in” option would involve junior debt holders, but not bank
depositors, and would aim to shrink the size of the banking sector by half over
10 years. It would seek to raise corporate income tax to 12.5 per cent (from
the current 10 per cent), and increase withholding tax on capital income to 28
per cent. It would also seek to extend the maturities on the €2.5bn loan that
Cyprus received from Russia last year.
A third option
would allow Cyprus to sell the shares it acquires in its ailing banks to the
European Stability Mechanism, once that eurozone rescue fund is allowed to
provide direct recapitalisation for banks.
Cyprus’s bailout,
while small compared to Ireland, Portugal and Greece, has proven unexpectedly
difficult because its size relative to the country’s gross domestic product
would increase debt to levels considered unsustainable both by the
International Monetary Fund and the German government.
The memo says that
without any relief, the bailout would stand at €16.7bn and increase the
country’s debt to 140 per cent of GDP by 2015, the end of the three-year
programme. That would make it the highest in the eurozone except for Greece.
The document says
that the ministers must decide what should be the appropriate debt-to-GDP level
for Cyprus. Some have argued for 100 per cent by the end of the programme
period (2015), while others believe it would be sufficient to hit that target
by 2020, it says.
No comments:
Post a Comment