Bruxelles, 25/03/2013 (Agence Europe) - After an abortive first attempt (see EUROPE 10808), on Monday 25 March 2013 the eurozone did as it had promised and agreed in the morning on a financial aid programme for Cyprus for later this month to ensure the European Central Bank keeps lending to struggling Cypriot banks.
The only thing in the new agreement that was in the previous one is that the eurozone will be providing a loan to Cyprus of €10 billion on the grounds that, despite total refinancing needs of some €17 billion, if Cyprus borrowed more, it would not be able to make the loan repayments to the European Stability Mechanism (ESM). As agreed last week, Cyprus must drum up €5.8 billion itself. Initially a savings raid was planned to the tune of 6.75% of savings of between €20,000 and €100,000 and 9.9% of savings of over €100,000, which was a watered-down version of an agreement reached with the eurozone, which hadn't exempted small savers from the savings levy. This idea was rejected out-of-hand by the Cypriot parliament on Monday (see EUROPE 10811), putting Cyprus in a difficult position and bringing the Eurogroup under fire for ignoring the EU savings guarantee that protects savings of up to €100,000. The eurozone justified the move by saying that Cyprus was a special situation - its banking sector is eight times bigger than the wealth of the country as a whole - and said the savings raid was a wealth tax, but the idea was rejected.
Details of the deal. Cyprus Popular Bank (Laiki) will be immediately split in two. A “bad bank” will be set up that will take all the toxic assets and will gradually be wound up. A “good bank” will take all savings of up to €100,000 (guaranteed under EU rules) and merge with Bank of Cyprus (BoC). Shareholders, senior lenders and people with savings of more than €100,000 will suffer heavy losses and, in this way, some €4.2 billion will be raised, explained the head of the Eurogroup, Jeroen Dijsselbloem. In addition to protected savings, BoC will get Laiki's debts to the ECB, estimated at €9 billion. BoC's non-guaranteed savings will be frozen at first and then cut by some 30% through a bank recapitalisation, explained a spokesperson for the Cypriot government, Christos Stylianides, on the radio on Monday. The savings raided will be turned into own capital in order to meet the Core Tier 1 capital requirement of 9% set by the European Banking Authority. This measure will not need to be voted through by the country's parliament, which voted through a law on Friday to cover bank restructuring.
Dijsselbloem says the old sum of €5.8 billion to be found by Cyprus no longer applies. A Cypriot source says that research by PIMCo into the bank bailout needs in Cyprus might be ignored, much to Cyprus' delight. The Cypriot bank industry will have to slim down signficantly to the EU27 average by 2018. Branches of Cypriot banks in Greece will be bought up by Greece's Piraeus Bank and bailed out from the bailout cash granted to Greece, whose banks are recovering. This is expected to save a quarter of a billion euro.
Strings attached. The Cypriot government has promised to slash spending, and make sjubstantial efforts on structural reforms (most of the measures have already been approved by the Cypriot parliament) and privatisation (which the former government was hostile to). Accused of ignoring money-laundering by Russia, Cyprus has agreed to undergo a new assessment of its anti-money laundering measures by a group of experts from the Council of Europe, Moneyval, along with a group of private consultants under the aegis of the Cypriot Central Bank. The Eurogroup says that the audit will start very shortly and a Cypriot source said it started last Tuesday. If corrective measures are needed, then they will be included in the loan agreement. Cyprus has increased its corporate tax rate from the very low 10% to 12.5%.
A much better agreement. German Finance Minister Wolfgang Schaüble echoed statements by the French finance minister and the head of the Eurogroup when he said the current deal was much better than the first, while Dijsselbloem said it had finally put an end to uncertainty about Cyprus in the eurozone. Dijsselbloem said that the new deal was so good that it could set an example for future bank resolutions. In an interview with the Financial Times and Reuters on Monday, he said the plan set an example for dealing with struggling banks in the eurozone and other countries that might need to restructure their banks.
The European Commission, aware of the potential social impact of the Cypriot bailout, has decided to set up a special task force to provide technical assistance to the Cypriot government, with a strong focus on jobs, competitiveness and growth, said EU Economic and Monetary Affairs Commissioner Olli Rehn. Rehn promised that the Commission would pull out all the stops to alleviate the social impact of the bailout.
IMF Director General Christine Lagarde said the deal shared the burden fairly because the burden to be borne by small savers and Cypriot taxpayers had not been increased. Moreover, although the previous deal introduced a levy on all Cypriot banks, the new agreement only raids the savings of two banks. She said she thought the deal would provide a sustainable and fully financed solution to the underlying problems facing Cyprus and that, now this deal was done, she was waiting for the deal to be agreed at the end of the troika's fact-finding mission (the troika is the European Commission, the European Central Bank and the International Monetary Fund) before recommending that the IMF board agree to provide financial aid. The details of the bailout deal, the Memorandum of Understanding, are expected to be finalised by the troika and the Cypriot government by the second half of April. The eurozone parliaments that need to give their agreement (Germany and the Netherlands, for example) will then ask their parliaments to ratify the deal. The ESM should be able to make the first payment in early May, said ESM chief Klaus Regling. The previous Cypriot government said that the country's cash requirements were covered until May.
Debt sustainability. The Eurogroup says that the deal will put the Cypriot debt on a sustainable trajectory, reducing it to 100% of GDP by 2020. French Finance Minister Pierre Moscovici said Cyprus should be able to borrow from the money markets unaided within three years or so.
Nobody will admit to the previous deal. Nobody has the courage to admit to being behind the earlier agreement last week although it was unanimous and the eurozone has collectively admitted responsibility. Moscovici says that it had been a “collective under-estimate of the impact of the savings raid”, pointing out that on 16 March, the president of Cyprus had endorsed the idea of a tax on all savings. Rumours suggest that the Cypriot president, Nicos Anastasiades, rejected the idea of taxing savings of above €100,000 by any more than 10%. In order to have a tax on savings of above €100,000 of no more than 9.9%, it was calculated that a tax of 6.75% would have to be levied on all savings of less than €100,000. The news of this special raid on savings generated fury among ordinary Cypriots and among Russians (who have invested large sums of money in Cypriot banks). Fearing a run, the banks closed their doors all week. The European Central Bank then set a strict deadline, saying that, if a deal to bail out Cyprus' banks were not reached on Monday, it would refuse to lend them any more money. Dijsselbloem rejected the idea that this deadline was a threat, saying that the ECB was simply sticking to its rules. According to a statement from the Eurogroup, the ECB Governing Council will now provide cash to BoC according to the rules in force. The Cypriot finance minister said the government hoped the banks would re-open as soon as possible.
The consequences of the ECB pulling the plug would have been catastrophic, beause it would probably have forced Cyprus out of the eurozone. “It's not that we won a battle, but we really have avoided a disastrous exit from the eurozone”, said Cypriot finance Minister Michalis Sarris at a press briefing after the Eurogroup meeting.
To prevent a run on the banks, the Cypriot government introduced capital controls. EU Internal Market Commissioner Michel Barnier pointed out that such restrictions could only be introduced on an exceptional basis and for a limited period of time.
A chorus of reactions. The president of the European Commission, José Manuel Barroso, and the president of the European Council, Herman Van Rompuy, welcomed the deal, which they were involved with in a series of meetings on Sunday with the Cypriot president, Nicos Anastasiades, Lagarde and the head of the ECB, Mario Draghi, on the fringes of the meetings of finance ministers (which had been delayed for a few hours). Van Rompuy said: “I am confident that the programme will work, but let's be honest. At this moment, we cannot say exactly what the impact is going to be. It will depend on the level of implementation and the commitment of Cyprus itself. We must all work hard to alleviate the social impact of the crisis in Cyprus, including via mobilising EU funds like the Youth Employment Initiative”.
Russia is not happy with the new agreement, which is still “stolen money”, stated the Russian prime minsiter, Dmitri Medvedev, and will be examining it with a fine toothcomb to understand how the situation arose and what the impact will be on the global financial and monetary system. He said that Russia would be looking after its own interests and was unlikely to lend any more to Cyprus. Russian President Vladimir Putin said it would be possible to support the efforts of the president of Cyprus and the European Commission to solve the crisis, adding that the Russian government would decide on the conditions for restructuring the €2.5 billion loan to Cyprus granted by Russia in 2011. (EL/transl.fl)