Brussels, 16/03/2013 (Agence Europe) - After nearly ten hours of talks, eurozone finance ministers managed in the early hours of Saturday morning 16 March to agree on a broad financial aid plan for Cyprus, requested in June 2012 and set in the end at €10 billion.
It took the new conservative Cypriot government of Nicos Anastasiades, which came to power on 1 March, a fortnight to get the eurozone and International Monetary Fund (IMF) to agree on aid after they had dragged their feet for nearly nine months. The victory is relative, however, for Cyprus because it will have to take money from holders of bank accounts in Cypriot banks to the tune of no less than a total of €5.8 billion.
Exceptional measures in exceptional circumstances
Cypriot Finance Minister Michalis Sarris admitted that it was not a pleasant outcome: “If we had not reached an agreement, there was a serious threat on the stability of the banking and financial system. A difficult decision that should be compared to the real possibility that much more money could have been lost in bankruptcy of the banking system or indeed of the country”. He said there was no alternative.
Over the weekend, the Cypriot government got its government to introduce a special 6.75% withholding tax on bank deposits of up to €100,000 and 9.9% on €100,000 and over. Cypriot government agency CNA says that Nicos Anastasiades held an emergency meeting with the government on Sunday 17 March. In addition, there is another tax at source on the interest on savings. The laws introduced this weekend will allow the tax to be taken from bank accounts on Tuesday morning when banks reopen after the bank holiday on Monday. Cypriot bank branches in Greece will also be affected by the measure, which will not cause any new cost burdens for the Greek bailout, said Joerg Asmussen of the Executive Board of the European Central Bank.
The rumours of savers having to pay towards the bailout caused some €1.7 billion to leave Cypriot bank accounts in January, but Sarris is confident that “calm and stability will return” now that the agreement has been reached. Depositors will receive shares in return for the tax on their savings.
The head of Eurogroup, Jeroen Dijjselbloem of the Netherlands, said that in the light of the problems facing Nicosia, which were of an exceptional nature given the sheer size of the country's bank industry (more than five times greater that the island's wealth), unique measures were needed. On leaving the meeting, French minister Pierre Moscovici said the politicians had done what needed to be done.
EU Economic and Monetary Affairs Commissioner Olli Rehn said the measure would share the burden fairly, adding: “This kind of stability fee is clearly a much better choice from the point of view of financial stability and Cypriot citizens than a full-scale bail-in, which would have led to very chaotic consequences in the Cypriot economy”. He said the “stability levy that was decided is a proportionate contribution by both resident and non-resident to solve a very specific and serious problem”. Dijsselbloem said this was an exceptional measure and was not being considered for other countries in receipt of aid.
An agreement that guarantees debt sustainability
By slashing back aid, Cyprus will be able to make its debt sustainable, which is a precondition for the IMF contributing to the bailout, which Germany views as essential. Together, the measures should reduce Cyprus' debt to 100% of GDP in 2020. “I welcome the agreement reached today to address Cyprus' economic challenges. The IMF has always said that we would support a solution that is sustainable, that is fully financed, and that appropriately allocates the burden sharing. I believe that the agreed package meets these three objectives. On this basis, I intend to make a recommendation to our Executive Board for the IMF to contribute to the financing of the package,' said IMF Director General, Christine Lagarde, sweeping aside rumours in the media that the IMF would not be contributing money, but only technical assistance. It is suggested that the IMF will provide around a billion euro.
The initial aid requirements of €17 billion (ten billion of which to bail out the banks), or the same as the country's GDP, led to doubts that it would be able to repay the loans. Forcing savers to cough up, along with the end of a relaxed fiscal policy (company tax will now rise from 10% to 12.5%) and some of the country's silver being sold off through privatisation, will provide Cyprus with the cash it needs to cover its spending requirements. Of the €10 billion euro aid package, six billion will be used to bail out and restructure banks. The cash will be fed into Cypriot banks in the form of bonds and bills, explained the director general of the European Stability Mechanism (ESM), Klaus Regling. The remainder of the €10 billion will be used to cover budget requirements and service the debt.
Russia needs to be won over. The Cypriot finance minister, with the eurozone deal under his belt, will travel to the Russian capital on Monday to discuss a potential loan from Russia. The head of the Eurogroup, Jeroen Dijsselbloem, warned that one should not expect the Russians to provide much aid because the Russian government has said on several occasions that it would only contribute if the eurozone did so first. Sarris said Russia was happy to relax the repayment conditions on a loan of €2.5 billion to Cyprus granted in 2011 now that agreement has been reached with the eurozone. This is expected to take the form of an extension of the repayment deadline and a reduction in interest rates.
Finalising the details. The ball is now in the troika's court (European Commission, ECB and IMF), and it has been asked to finalise the details of the Memorandum of Understanding (aid deal) with the Cypriot government as soon as possible. The MoU might be formally endorsed by the ESM board in the second half of April, once it has been given the go-ahead by some eurozone nations' parliaments.
Meanwhile, the money laundering audit will start very quickly. It will be carried out under the aegis of the Cypriot Central Bank by Moneyval, a Council of Europe expert group, and a private consultancy.
Countries like Germany, Finland and the Netherlands demanded that a new audit be carried out to ensure that taxpayers' cash (from the eurozone) would not serve to launder dirty Russian mafia cash, which is what these countries alleged might happen. Cyprus has promised to take any corrective measures that might be necessary.
Some say that these money-laundering fears were what led to cash being taken from private individuals' deposits held in Cypriot banks. Dijsselbloem rejected the idea that the eurozone was punishing Cyprus, saying that the eurozone was standing by the Cypriot government. The Cypriot finance minister said Cypriots could now look to the future with confidence. AFP suggests Cypriots will wake up on Saturday morning in a state of shock when they learn the details of what was agreed the previous night. (EL/transl.fl)