Savers forced to bear costs in Cyprus bailout

The euro zone struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risks of a wider bank run.            

Cyprus becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help in the wake of the region's debt crisis.  
             
In a radical departure from previous aid packages, euro zone ministers forced Cyprus' savers, almost half of whom are believed to be non-resident Russians, to pay up to 10 percent of their deposits to raise almost 6 billion euros.                  

"I wish I was not the minister to do this," Cypriot Finance Minister Michael Sarris said after 10 hours of late-night talks where euro zone finance ministers agreed the package.                               

"Much more money could have been lost in a bankruptcy of the banking system or indeed of the country," he said, adding that he hoped a levy and bailout would mark a new start for Cyprus.              

Without a rescue, Cyprus would default and threaten to unravel investor confidence in the euro zone that has been fostered by the European Central Bank's promise last year to do whatever it takes to shore up the currency bloc.                         

The bailout was smaller than initially expected and is mainly needed to recapitalize the Mediterranean island's banks that were hit by a sovereign debt restructuring in Greece.                       

The levy on bank deposits will come into force on Tuesday, after a bank holiday on Monday. Cyprus will take immediate steps to prevent electronic money transfers over the weekend.                           

"As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders," Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting in Brussels, told reporters.            

Such levies break the taboo of hitting bank depositors with losses, but Dijsselbloem said it would not have otherwise been possible to salvage its financial sector, which is around eight times the size of the economy.            

"We are not penalising Cyprus... we are dealing with the problems in Cyprus," Dijsselbloem said.              

In return for emergency loans, Cyprus also agreed to increase its corporate tax rate by 2.5 percentage points to 12.5 percent.                                        

This should boost Cypriot revenues, limiting the size of the loan needed from the euro zone and keep down public debt.              

Dijsselbloem said that under the program, the island's debt would fall to 100 percent of economic output by 2020.  


REUTERS