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Cyprus Aims to Meet Bailout Terms Today, Deposit Tax Debated

March 23, 2013

Cyprus Aims to Meet Bailout Terms

"We cannot fund banks that are bankrupt," ECB council member Erkki Liikanen told Finland's YLE TV1 today. Photographer: Simon Dawson/Bloomberg

Cyprus aims to complete a plan today to meet the terms of a European bailout that may include tapping bank deposits, its finance minister said, as the Mediterranean island races to avert financial collapse.

After parliament approved capital controls and legislation to wind down banks yesterday, Cypriot officials are working on additional measures that could include a levy on bank deposits above 100,000 euros ($130,000). Finance Minister Michael Sarris, who is meeting with representatives of the so-called troika of the European Central Bank, European Commission and International Monetary Fund in Nicosia today, said during a break in the talks that a deposit levy is being discussed.

Cyprus is scrambling to come up with 5.8 billion euros, a prerequisite for a further 10 billion euros in bailout funds it needs to prevent financial ruin and stay in the euro. Lawmakers’ rejection of an initial proposal to tax all bank deposits last week prompted the ECB to threaten to cut off emergency funding to Cypriot banks unless a deal is reached by March 25. Banks have been shut all week and are due to reopen on March 26.

“We cannot fund banks that are bankrupt,” ECB council member Erkki Liikanen told Finland’s YLE TV1 today. “There is now a chance of drawing up a program in which the banks are recapitalized or reorganized to reach solvency. The ball is in Cyprus’s court.”

Progress Made

Sarris said officials made progress in their first meeting today, though some issues require further work. He said he expects a bill to be ready for parliament to discuss later today.

President Nicos Anastasiades will meet with political party leaders at 8 p.m. local time tonight to brief them on the troika talks, his office said in an e-mailed statement.

Lawmakers yesterday agreed to wind down Cyprus Popular (CPB) Bank and impose losses on its depositors. The government only wants to tap deposits at one other bank -- the biggest lender, the Bank of Cyprus -- said Averof Neofytou, deputy president of the ruling Disy party. State-run broadcaster CyBC reported earlier today that a levy of 25 percent on deposits over 100,000 euros is being discussed.

Should the troika reject that plan, a levy would be applied at all banks, a lawmaker said on condition of anonymity because the talks are still underway.

Eurogroup Meeting

European finance ministers will convene to discuss the latest Cypriot proposals at 6 p.m. Brussels time tomorrow, Jeroen Dijsselbloem, who chairs the so-called Eurogroup, said in a posting on Twitter today.

Cyprus was thrust onto the international stage last week after European finance ministers provoked outrage in the country and abroad by proposing levies on all bank deposits. While the Cypriot parliament rejected that plan, European leaders stuck to their demand that Cyprus contribute 5.8 billion euros to a bailout package.

The Stoxx Europe 600 Index (SXXP) fell for the first week in a month on the back of the Cypriot turmoil and the euro posted its biggest two-day drop since July at the start of the week. Still, the Stoxx 600 was little changed yesterday as investors anticipated a compromise and Europe’s single currency rose 0.7 percent.

“I don’t see any major contagion issues,” Finish Prime Minister Jyrki Katainen told reporters in Saariselkae, Finnish Lapland, today. “I’m very confident that we can see solutions tomorrow or Monday.”

Bills Passed

The Cypriot parliament passed nine bills late yesterday aimed at preventing capital flight and restructuring the banking sector. Even so, President Anastasiades may find himself short of the money required to satisfy EU leaders.

Winding down Cyprus Popular Bank, the nation’s second- biggest lender, would only bring the bill down to 3.5 billion euros, Neofytou said yesterday. Cyprus Popular depositors with more than 100,000 euros will face losses, he said.

“They will wait for many years before they see what percentage they will get back from their savings -- 30 percent, 40 percent, 50 percent, 60 percent,” Neofytou said during the debate in parliament. “At the same time this political decision to support this harsh law completely safeguards another 361,000 savers of a total of 371,000.”

Bad Bank

One plan pushed by European finance officials could see Cyprus Popular and the Bank of Cyprus split to create a so- called bad bank. Insured deposits -- below the European Union ceiling of 100,000 euros -- would go into a so-called good bank and not sustain any losses, while uninsured deposits would go into the bad bank and be frozen until assets could be sold, four euro-region officials said.

Cyprus in June became the fifth euro-area nation to request a rescue. The move came after Greece’s debt restructuring, the largest in history, trashed the financial health of lenders including Bank of Cyprus and Cyprus Popular.

Cyprus Popular, founded in 1901 as a small savings bank, operates in Cyprus, Greece, the U.K., Ukraine, Russia, Romania, Serbia, Malta and China through 439 branches, serving 1.35 million customers, according to information on its website.

The bank, which employs about 8,500 people, posted a net loss of 1.56 billion euros for the first nine months of 2012, after a net loss of 3.65 billion euros in 2011 following writedowns on Greek government bond holdings, goodwill related to its Greek business and provisions for loan losses.

Merkel Anger

Cyprus’s total bank assets swelled to 126.4 billion euros at the end of January, seven times the size of the 18 billion- euro economy, from 78 billion euros in 2007, data from the European Central Bank and the EU’s statistics office show. Russian companies and individuals have an estimated $31 billion of wealth in Cyprus, according to Moody’s.

At 17 billion euros, Cyprus’s financial needs are almost equivalent to the country’s entire economic output, a magnitude of bailout that has never been awarded before, Merkel told reporters on March 20. That means “the bank sector must contribute to the sustainability of Cypriot debt,” she said.

Sarris, who met the same day in Moscow with Russian First Deputy Minister Igor Shuvalov and Finance Minister Anton Siluanov, said yesterday that Russia wouldn’t offer additional support beyond restructuring a 2.5 billion-euro loan granted in 2011.

Merkel told a closed-door meeting of legislators in Berlin yesterday that Cyprus must now act quickly, a party official said.

Cyprus is living “in an illusion,” Michael Meister, deputy parliamentary leader of Merkel’s CDU, told BBC Radio 4’s “Today” program. “They have to restructure the whole economy, restructure the banking sector and until now I don’t see the Cyprus people and politicians agreeing on this.”

To contact the reporters on this story: Tom Stoukas in Nicosia at astoukas@bloomberg.net;

Georgios Georgiou in Nicosia at ggeorgio5@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net


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