Euro Area Takes Aim at Depositors in Cyprus Bailout

By Rebecca Christie & Corina Ruhe 

Euro-area finance ministers agreed to tax bank deposits in Cyprus in an unprecedented measure to forge a 10 billion-euro ($13 billion) rescue plan.

Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros -- the ceiling for European Union account insurance -- and 9.9 percent above that. The measures will raise 5.8 billion euros in addition to the emergency loans, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters early today after 10 hours of talks in Brussels.

The European Central Bank will make funds available to the region’s banks as needed to counter potential bank runs. Depositors will receive bank equity as compensation. Finance Minister Michael Sarris said the plan was the “least onerous” of the options Cyprus faced to stay afloat.

“It’s not a pleasant outcome, especially of course for the people involved,” Sarris said in Brussels at 4:55 a.m.

Funds to pay the levy were frozen in accounts immediately, ECB Executive Board Member Joerg Asmussen said. The levy will be assessed before Cypriot banks reopen on March 19 after a March 18 national holiday. Sarris said electronic transfers will also be limited until then.

“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem said, noting the country’s financial industry was five times the size of its economy. The plan includes “unique measures” that address the “exceptional nature” of Cyprus and show “inflexible commitment to financial stability and the integrity of the euro area.”

Cyprus Risks

Even though it accounts for less than half a percent of the euro economy, the Mediterranean island nation tested leaders’ resolve in overcoming the debt crisis and preventing contagion to Italy and Spain. Policy makers began meeting at 5 p.m. yesterday in Brussels in a hastily convened gathering, seeking to overcome differences on losses to be borne by investors while financial markets were closed.

The International Monetary Fund will consider contributing money to the rescue, said IMF Managing Director Christine Lagarde, who travelled to Brussels for the talks. “We believe that the proposal as outlined by Jeroen is actually sustainable,” she said.

Cyprus pledged to step up asset sales and enact budget cuts amounting to 4.5 percent of gross domestic product. The aid program, which should be completed by the second half of April, calls for its debt to be 100 percent of GDP by 2020. The EU forecasts it at 93 percent this year. The deal calls for the banking sector to shrink substantially by 2018.

Juncker Doubts

Skeptics including Luxembourg’s Jean-Claude Juncker had said that imposing investor losses in Cyprus risked reigniting the financial crisis that has so far pushed five of the euro zone’s 17 members to seek aid. Last year, the euro area took what officials called a unique step to ask Greek bondholders to absorb losses.

Asmussen said tapping deposit holders was needed to expand Cyprus’s tax base. European Union Economic and Monetary Affairs Commissioner Olli Rehn called the assessment a strictly fiscal measure. Rehn had warned against so-called haircuts on depositors to avoid setting a destabilizing precedent.

When asked if a deposit assessment could be ruled out for future rescues, Rehn said in an interview: “It can and there is no concrete case where it should be considered.”

ECB Role

Cypriot banks are on track to regain access to ECB emergency lending facilities once they have been successfully recapitalized, Asmussen said. Cyprus is “systemically relevant” and needs assistance to ensure stability of the euro, Asmussen told reporters.

The ECB also will be available to euro-area banks that may need extra liquidity, Asmussen said. Authorities plan to ringfence Cypriot bank branches in Greece, through transactions with Greek banks that won’t require money from Greece’s rescue funds, he said.

Corporate tax rates in Cyprus will rise to 12.5 percent to 10 percent as part of the deal, Dijsselbloem said. Rehn told reporters that Russia also would ease terms on its existing loans to Cyprus as the rescue unfolds.

At the talks, the ministers also agreed to give extra time to Ireland and Portugal to repay loans to the European Financial Stability Facility. The euro group, IMF and ECB will approve the details of the extensions and the Cyprus deal once technical details have been ironed out and national parliaments have acted as needed, the finance ministers said in a statement.

----With assistance from James G. Neuger, Ben Sills, Patrick Donahue, Jonathan Stearns, Gregory Viscusi and Stephanie Bodoni in Brussels. Editors: James Hertling, Patrick Henry

----With assistance from Patrick Donahue, James G. Neuger, Ben Sills, Jonathan Stearns, Gregory Viscusi and Stephanie Bodoni in Brussels. Editors: James Hertling, Patrick Henry

To contact the reporters on this story: Rebecca Christie in Brussels atrchristie4@bloomberg.net; Corina Ruhe in Brussels at cruhe@bloomberg.net

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