European leaders have reached a deal on a new bailout for Cyprus, as the European Central Bank (ECB) deadline on suspension of funds to the country’s banks threatened to plunge the island into bankruptcy.
The Cypriot government and its international creditors, the troika of the EU, ECB and International Monetary Fund (IMF) agreed to a deal in the early hours of Monday morning (25 March) that will see depositors with less than €100, 000 exempt from having to pay a levy on their savings, but with larger deposits being subjected to a greater levy than originally proposed, possibly as much as 40%.
The deal will also see the county’s second biggest bank. Laiki, being restructured and split into ‘good’ and ‘bad’ banks, with the good assets being taken over and managed by the Bank of Cyprus.
This is the second attempt to reach a deal with Cyprus, following an initial agreement that would have seen €10 billion come from the troika, with the island being expected to raise €7 billion from a one-off bank levy, with depositors with savings of under €100,000 having to pay a levy of 6.75%, and those with over €100,000 paying 9.9%. This raised concerns in European circles that it violated the deposit guarantee scheme, which ensures savings of under €100,000 are guaranteed under European law. Speaking in the European Parliament on 21 March, Eurogroup president, Joroen Dijsselbloem tried to downplay fears, saying that a tax on savings under €100,00 would not set a precedent for other EU countries. However, he also said that large and small depositors needed to be treated differently.
The new deal came on the day that the ECB was due to remove support for Cypriot banks, which would have sent Cyprus into bankruptcy and provided a real possibility of the country being the first to exit the Eurozone.
Cypriot President, Nicos Anastasiades and Finance Minister, Michalis Sarris, flew to Brussels on Sunday for emergency talks with the leaders of the European Commission and Council and Eurogroup ministers, and later with IMF chief Christine Lagarde and ECB President, Mario Draghi.
German Finance Minister, Wolfgang Schaüble, speaking before the round of meetings was staunch in his government’s defence of the euro. “I’m aware of my responsibility for the stability of the euro. If we take the wrong decisions we’ll be doing the euro a great disservice,” he was quoted as saying by Welt am Sonntag.
Discussions during the meetings were reportedly tense, with the IMF and Germany insisting that depositors take some of the burden, and that the country’s financial system be greatly reduced. An earlier proposal has suggested taking the money from pension schemes. The island, a tax haven with significant amounts of Russian deposits, has come under pressure of late from the EU over implementing robust money-laundering rules. Last week, Sarris flew to Moscow, which has already loaned Cyprus €2.5 billion, to discuss the possibility of more money being received from the Russian government, but no deal was reached.
Last week, Dijsselbloem had also said that the financial sector needed to be “downsized”, but there are fears on the island that heavy taxes on large savers would severely damage the sector, which is around seven times larger than the country’s GDP.
There were also reports by Cypriot media that President Anastasiades, elected in February on a pro-bailout ticket, offered his resignation to the troika.
The details of the deal will be deal are due to be discussed as the Eurogroup meets again on 25 March, with reports that large depositors, mainly Russian, could be hit for as much as 40%, with Dijsselbloem saying that the solution“will be concentrated where the problems are, in the large banks.”
There will also be discussions on a possible re-opening of Cypriot banks, which have been closed for a week amid fears of a run on the banks. The Bank of Cyprus has imposed a limit on withdrawals from ATM machines of €120 a day, with Laiki, setting a lower threshold of €100 a day. Meanwhile, the country is operating as a cash-only economy.