New Cypriot leader thrashes out details of €10bn EU bailout

 
Tim Wallace
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JUST weeks after taking the Cypriot presidency, Nicos Anastasiades this weekend agreed a long-awaited bailout with the Eurozone and IMF.

In a deal struck nine months after Cyprus formally requested international help for its struggling banks, the Cypriot government will borrow around €10bn (£8.55bn) from the international bodies, with the IMF potentially contributing €1bn of that. But domestic savers are being hit hard under the deal, with the biggest savers losing up to 15 per cent of their deposits.

Other conditions are attached to the bailout – the corporation tax rate is being increased from 10 per cent to 12.5 per cent, and anti-money laundering controls will be beefed up. Final details were being thrashed out last night by politicians, who have extended the three-day weekend into tomorrow, halting a run on the banks. The holiday could even be carried in to Wednesday.

The politicians fear the backlash if they tax those with little saved up, so were last night considering reducing or eliminating the burden on those with the least. If the tax grab was focused only on those with over €100,000 it would need to come in at 15 per cent to raise the same amount.

Cypriot President Nicos Anastasiades warned that without the raid on savings the situation would be far worse. He claims without the package two banks would collapse within days, leaving the state with a compensation bill of €30bn which could not be paid.

“Such an uncontrolled situation would push the whole banking system into collapse with all the attendant consequences,” he said. “As a result, the service sector would be led to a complete collapse with a possible exit from the euro.”

Under the plan those who lose deposits will be compensated with shares, while those who keep funds in the banks will be rewarded with natural gas revenue-backed bonds.

Q and A: What has gone wrong in Cyprus?

Q Why is Cyprus in such a mess?

A One of the most immediate causes is the Cyprus’ close ties with Greece – its banks lost money on loans which went bad as Greece collapsed, and lost more when the haircut on Greek government bonds hit last year.

Q Who is losing out here?

A Anyone with money in accounts in Cyprus. Those with less than €100,000 will lose 6.7 per cent while those with more will lose 9.9 per cent. Junior bondholders will also be hit. And as depositors will be compensated with shares, shareholders will be diluted.

Q Are those depositors all Cypriots?

A No, between one-third and one-half of the roughly €60bn in deposits are thought to belong to foreigners, particularly Russians. But politicians are not thought to have much sympathy with them, with Cyprus long regarded as a haven for money launderers.

Q Is there any alternative?

A The President says not, as do analysts at Barclays. Without depositors taking a hit, the country’s debt to GDP ratio would soar from 86 per cent to an unsustainable 145 per cent.

Q Will it be voted through?

A Probably. The vote has been delayed on negotiations to reduce the impact on smaller depositors, but a majority of the 56-strong parliament is thought to back the plan in principle.

PROFILE: THE EUROPEAN DEALMAKERS

WOLFGANG SCHÄUBLE
GERMAN FINANCIAL MINISTER
Schäuble, under pressure from German voters – pre-election – to be frugal, made a hard bargain to get the levy on deposits. One key motivation was the worry that the bailout would hand money to rich Russians.

NICOS ANASTASIADES
CYPRIOT PRESIDENT
Anastasiades promised on his first day in office that “absolutely no reference to a haircut on public debt or deposits” would be tolerated, but has had to go back on his threat to get the bailout his country needs.

JEROEN DIJSSELBLOEM
HEAD OF EUROGROUP
Dijsselbloem, enthroned to succeed Jean-Claude Juncker as Eurogroup head in January, added massive hikes in savings interest and corporate tax to the deposit cash grab as EU conditions of a bailout.