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Cyprus “bailout deal” shocks savers, they flock to banks

Depositors by the 100′s flocked to co-operative banks early in the morning Saturday to withdraw their savings and cash following an Eurozone bailout deal for Cyprus to be told that their deposits are temporarily blocked.

The Eurogroup Brussels deal, concluded in the early hours of Saturday after a marathon negotiation which lasted over 10 hrs, sent waves of shock through the entire population of Cyprus as it includes a “Haircut” on all bank deposits a measure which authorities said had not been part of the bailout negotiations.

Co-operative banks are the only monetary institutions offering bank services on Saturday, commercial banks are closed.

Automatic cash machines ATMs at banks are also not in service.

Eurogroup and International Monetary Fund IMF officials working through the night in Brussels forced on newly elected Cyprus President Nicos Anastasiades, taking part in a European meeting for the 1st time, a “Solidarity Levy” of 9.9% by bank depositors whose savings exceeded 100,000 euros and 6.75 percent on those having smaller deposits.

Some European countries; Germany, the Netherlands and Finland insisted during the negotiations that Russian “Oligarchs” with fat deposits in Cypriot banks be forced to take a loss, but the measure was finally extended to include all Cypriot depositors. Owners of bank accounts will be compensated by bank stock issue.

The 1-off levy on bank deposits, along with a tax on the interest of deposits, has been designed as part of other measures to force a downsizing of the banking system of Cyprus, now 8 times the size of its annual economy, to 3.5 times, which is the EU average.

The levy is expected to generate just under EUR 6-B, resulting in a lower bailout amount which is estimated to be around EUR10-B. The money will be given by EU countries, along with the International Monetary Fund, which will reportedly contribute EUR 1-B.

Participation of the IMF in the Cyprus bailout was a precondition set down by some Eurogroup countries.

The deal struck in Brussels requires that the levy be imposed by 19 March, meaning that the Cypriot parliament will have to meet in an emergency session either Sunday or on Monday to pass necessary legislations.

The bailout deal also included an increase of 2.5 percentage points on the corporate tax to 12.5%, expected to generate EUR 200-M a year, and salary and pension cuts, along with tax hikes in force since last Summer.

The bailout program is expected to allow Cyprus to reduce its sovereign debt down to 100% of its GDP by Y 2020.

Without a bailout deal Cyprus would slip into an uncontrolled default and this fact was used as leverage on the eastern Mediterranean island’s government by hard bargaining EU partners and the International Monetary Fund.

The state broadcaster reported from Brussels that during the 10-hr hard bargaining the Cypriot president had threatened 3 times to leave the negotiations and asked for a break to consult with political associates.

In the end he was faced with the dilemma of either a default along with exiting the Eurozone or accepting the tough measures dictated by Germany and the other tough-playing partners.

Cyprus finance minister said it had been a difficult decision to take, but it averts a bankruptcy and offers the possibility of a new start in rebuilding the economy.

He seemed to be shocked by the Eurogroup decision, which triggered widespread reaction in Cyprus.

“I wish I was not the minister to do this,” Mr. Sarris said after the negotiations were over.

Mr. Sarris will travel to Moscow Wednesday to conclude a deal with his Russian counterpart on extending the maturing of a EUR 2.5-B Russian loan to Cyprus from Y 2016 to Y 2021 and on reducing the loan interest from 4.5 to 2.5%.

Cyprus asked for a further EUR 2-B loan from Russia but European Commissioner for economic and monetary affairs Ohli Rehn said Moscow did not seem willing to contribute further the Cyprus rescue.

Despite the conclusion of the rescue deal, details are yet to be finalized, including selling Cypriot bank interests in Greece for an estimated EUR 2-B.

The 2 largest Cypriot banks are estimated to have given loans totaling EUR 25-B to Greek businesses and households.

The 2 banks will require about EUR 10-B to recapitalize following their losses in Greece, which also resulted out of holding Greek bonds worth EUR 6-B, which were reduced in value by almost 75% as part of the country’s bailout.