After fraught negotiations, euro-zone finance ministers reached a deal
early Saturday to provide up to €10 billion ($13 billion) bailout funds to
Cyprus, which faces bankruptcy in May. For the first time, deposits at banks in
a country are being seized to assist in the rescue.
Euro-zone finance
ministers and the International Monetary Fund reached a deal with Cyprus early
Saturday morning on a bailout package for the country that has been the subject
of dispute for months now. It will mark the first time that savers in a country
in the euro zone are required to participate in a bailout.
"The Euro
Group was able to reach a political agreement with the Cypriot authorities on
the cornerstones of this agreement," Euro Group President Jeroen
Dijsselbloem said. "The assistance is warranted to safeguard stability in
Cyprus and the euro zone as a whole," he said. Dijselbloem added that a
letter of intent would be completed next week so that the deal could be
approved by national parliaments.
International
Monetary Fund chief Christine Lagarde said the fund would contribute to the
bailout but did not specify the exact amount.
Initial reports
suggest the bailout package, which will be provided by the long-term euro
rescue fund, the European Stability Mechanism (ESM), will carry a total value
of up to €10 billion ($13 billion). In return, Cyprus has pledged to
recapitalize its ailing banks and clean up government spending. Without the
bailout, the country would default in May.
Levy To Raise €5.8 Billion
The deal followed intense
negotiations and the main sticking point during the 10-hours of talks had been
the demand that savers at Cypriot banks also be required to contribute to the
bailouts of the beleaguered financial institutions. Under the deal, any bank
account holder in Cyprus with deposits exceeding €100,000 will be subjected to
a one-off levy of 9.9 percent of their savings. Accounts with less than a
€100,000 would be required to make a 6.75 percent payment. In total, the
deposit tax is expected to generate around €5.8 billion.
Large sums of
money have been deposited in Cypriot banks by foreign customers, particularly
wealthy Russians and Brits. Russian oligarchs have billions in deposits in the
banks, and almost half of the deposits in the country are believed to be from
non-resident Russian citizens. Together, the country's banks hold close to €70
billion in deposits. Cyprus also agreed to raise the country's nominal
corporate tax rate, the lowest in Europe, by 2.5 percentage points to 12.5
percent. But sources said the country would not be given a debt haircut.
The Cypriot
government said Saturday it would cease electronic transfers to prevent savers
from wiring money out of the country. And Jörg Asmussen, a German board member
of the European Central Bank said that the amount of the one-time levy would
immediately be frozen in all accounts in Cyprus. Banks in the country will also
be closed on Monday because of a holiday. The Cypriot government is expected to
pass a law this weekend approving the levy. "I assume that the levy can be
applied before the banks reopen normally on Tuesday," Asmussen said.
A 'Fair Way of Sharing the Burden'
Cypriot Finance
Minister Michalis Sarris said he hoped for a fresh start for Cyprus following
the bailout. "It's not a pleasant outcome, especially for the people
involved," he said. "This is a once and for all levy." He added
that the tax would be a "very fair way of sharing the burden." He
also said it had been necessary to "protect the general welfare of the
people and the stability of the system".
Cyprus has
suffered massively as a result of its domestic banking crisis. The financial
sector plays an extremely important role in the Cypriot economy. The debt
haircut of private creditors in Greece last year also created significant problems
for numerous Cypriot financial institutions. Cyprus officially requested a
€17-billion aid package from Brussels in June.
In recent weeks,
EU member states bitterly debated whether or not to give a bailout package to
Cyprus. Germany had called for restraint in providing aid and also sought to
impose conditions, including that of requiring savers to participate. The IMF,
the Netherlands and Finland also supported Germany's position.
Russia Likely to
Assist
For the first time
in the three-year euro crisis, Russia is also likely to participate in the
bailout. European Economic and Currency Affairs Commissioner Olli Rehn said
Russian Finance Ministry officials indicated they would consider easing the
terms of a €2.5 billion loan paid to Cyprus two years ago. The repayment
schedule could be lengthened and the interest rate lowered. Cypriot Finance
Minister Sarris is expected to travel to Moscow to negotiate on Monday, a
Cypriot diplomat told reporters.
Germany and other
countries have been irritated by a combination of a low corporate tax rate and
lax financial oversight that they claim has made Cyprus a haven for Russian
money laundering to the tune of billions. Under the agreement, an independent
private company will be installed in the country to observe Cyprus' adherence
to the EU's anti-money laundering regulations.
The bailout
package must still be approved by Germany's federal parliament, the Bundestag.
Following Greece, Portugal and Ireland, Cyprus will become the fourth country
to obtain a full bailout under the euro rescue effort. Spain is also receiving
money, but only to recapitalize its ailing banks.
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