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European finance ministers have agreed an £8.7bn bailout for Cyprus which includes all Cypriot bank customers handing over up to 10% of their savings.

Cyprus becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the eurozone for financial help amid the region's debt crisis, but also faces a possible run on its banks as depositors try to avoid losing up to 10% of their savings.

The savers, half of whom are thought to be Russian, will raise almost €6bn. It is the first time a bailout has included such a measure.

"I wish I was not the minister to do this," the Cypriot finance minister, Michael Sarris, said after 10 hours of late-night talks in which eurozone finance ministers agreed the package. "Much more money could have been lost in a bankruptcy of the banking system or indeed of the country."

Without a rescue, Cyprus would default and threaten to unravel investor confidence in the eurozone, a renewed confidence fostered by the European Central Bank's promise last year to do whatever it takes to support the euro.

However, on Cyprus, initial incredulity at the decision gave way to anger. Co-op credit societies, normally open on Saturdays, were shut for business in the coastal city of Larnaca as depositors started queuing early in the morning to withdraw their cash.

"I'm extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans," said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.

"They call Sicily the island of the mafia. It's not Sicily, it's Cyprus. This is theft, pure and simple," said a pensioner.

The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks hit by sovereign debt restructuring in Greece.

Cypriots with savings of under €100,000 will pay a one-off levy of 6.75%, which rises to 9.9% for those with larger deposits.

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," the 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, adding that that under the programme, the island's debt would fall to 100% of economic output by 2020.

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

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

The International Monetary Fund managing director, Christine Lagarde, who attended the meeting, said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.

"We believe the proposal is sustainable for the Cyprus economy," she said, "The IMF is considering proposing a contribution to the financing of the package ... The exact amount is not yet specified."

Cyprus, with a GDP of barely 0.2% of the EU bloc's overall output, applied for financial aid last June, but negotiations were stalled by the complexity of the deal and the reluctance of the island's previous president to sign.

Moscow, which has close ties with Nicosia, is likely to help by extending a €2.5bn loan to Cyprus by five years to 2021 and reducing the interest rate

Josh wrote:And now the unsustainable folly of the Euro eats Cyprus.

How this leads to anything but a collapse of their banking system, I'm waiting to see.

NICOSIA — The Cypriot Parliament on Tuesday overwhelmingly repudiated a €10 billion international bailout package that would have set an extraordinary precedent by taxing ordinary depositors to pay part of the bill.

The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that might still enable the country to receive a financial lifeline, while avoiding a devastating default that could reignite the euro crisis.

Lawmakers rejected the plan, with 36 voting no and 19 abstaining, arguing that it would be unacceptable to take money from account holders. One member of Parliament who was out of the country did not vote.

Marios Karoyian, the head of the Democratic Party in Mr. Anastasiades’s coalition government, called the bailout terms an “attack” against Cyprus. “The decision for a haircut is unethical and erodes the foundation of the E.U.,” he said. “We’re dealing with raw blackmail that could lead to the collapse of the euro zone.”

Analysts have raised the possibility of a bank run in Cyprus and a cut-off of financing to Cypriot banks from the European Central Bank if the measure did not pass. It is still possible banks might not be able to open their doors Thursday, the day that a scheduled bank holiday was supposed to end.

Michael Olympios, chairman of the Cyprus Investor Association said Parliament’s rejection of the bailout deal “will buy us some time to see if we can come up with a better agreement.”

He said one possibility under active consideration was for a Russian bank to buy Cyprus's biggest troubled lender, Cyprus Popular Bank, in a deal that could reduce the amount of the €10 billion bailout sought by Cyprus. Any such move would very likely be backed by the Kremlin, Mr. Olympios added, and could reduce the tax that Russian depositors might otherwise have to pay.

The Cypriot finance minister headed to Moscow earlier in the day to seek financial assistance from Russia.

The bailout measure failed Tuesday night despite a revision that would have removed some objections by exempting small bank accounts from the levies.

The European Central Bank indicated late Tuesday that it would not immediately cut off emergency cash — without which Cypriot banks probably could not survive. In a terse statement, the E.C.B. said it had taken note of the Cypriots Parliament’s decision and was consulting with the International Monetary Fund and European Commission, its partners in the so-called troika of international lenders that are trying to keep Cyprus financially afloat.

But, in a tacit warning that it would not provide the so-called emergency liquidity assistance forever, the E.C.B. said it would stick to rules that allow lending only to solvent banks. The Cyprus banks, while wobbly, are not yet insolvent. “The E.C.B. reaffirms its commitment to provide liquidity as needed within the existing rules,” the central bank said.

The original terms of the bailout, as reached last weekend, called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000. The taxes, a condition imposed by Cyprus’s fellow E.U. members, were meant to raise €5.8 billion of the total €10 billion bailout cost.

Under the revision put forward by Mr. Anastasiades early Tuesday, depositors with less than €20,000 in the bank would be exempt, but the taxes would remain in place for accounts above that amount.

The rejection drew loud cheers and cries of joy from a crowd of more than 500 protesters who had gathered in front of Parliament since late afternoon, carrying banners denouncing what they said was a confiscation of their private funds. Some wielded unflattering posters of Chancellor Angela Merkel of Germany, a day after a demonstrator breached security at the German Embassy and climbed to the roof, throwing down the German flag.

“Today, Germany is engaging in Nazism again, not with the weapon of force, but with money,” said a pensioner, Dimitris, 67, who would give only his first name.

The central bank governor, Panicos O. Demetriades, had said the revised plan would fall €300 million short of the €5.8 billion demanded by the international lenders. The gap would be considered a breach of the bailout agreement, he said, and “perhaps might not be accepted” by the bailout negotiators.

And even as Mr. Anastasiades submitted the revised plan to Parliament, he had acknowledged that the changes probably would not be enough to secure a majority in the 56-member legislature. “I estimate that the Parliament will turn down the package,” he said on state television as he headed into a series of meetings.

The managing director of the International Monetary Fund, Christine Lagarde, said earlier Tuesday that she was in favor of modifying the agreement to put a lower burden on ordinary depositors. “We are extremely supportive of the Cypriot intentions to introduce more progressive rates,” she said in Frankfurt.

She had urged leaders in Cyprus to quickly approve the plan agreed by European leaders in Brussels last weekend. “Now is the time for the authorities to deliver on what they have commented,” Ms. Lagarde said.

She complained that critics have not recognized the value of the agreement, in that it would force banks in Cyprus to restructure and become healthier.

In Brussels, Simon O’Connor, a spokesman for Olli Rehn, the E.U. commissioner for economic and monetary affairs, said Tuesday that finance ministers from countries using the euro had agreed the previous night in a teleconference that Cyprus could adjust the way the levy would operate.

But Mr. O’Connor said the E.U. authorities were still waiting to see whether the adjustments being discussed in Cyprus delivered “the same financial effect” as the agreement between Cyprus and international lenders in the early hours of Saturday.

“On the parameters of this levy, we will not comment as long as that’s a process that’s still under way,” Mr. O’Connor said.

On the prospect that expatriates in Cyprus may not have access to their bank accounts any time soon, the British Ministry of Defense said Tuesday that it had sent a Royal Air Force plane to Nicosia with €1 million on board to offer loans to British military personnel there.

The money, it said, was meant to “provide military personnel and their families with emergency loans in the event that cash machines and debit cards stop working completely.”

The ministry also said that it offered to pay the salaries of employees in Cyprus into British bank accounts. “We’re determined to do everything we can to minimize the impact of the Cyprus banking crisis on our people,” the ministry said in a statement.

SirNitram wrote:It's also a major hub for not-so-legal money laundering. But for the everyday citizen, he just got shafted. AUSTERITY!

Josh wrote:However, at least as of last night the best contender for a bailout was Gazprom, who was offering to save them in exchange for undeveloped natural gas fields. So the rock and the hard place is the EU and Uncle Vlad.

frigidmagi wrote:Correct me if I'm wrong Havoc but doesn't deposit insurance means that if the banks fold you would at least get some of your money back?

frigidmagi wrote:Cyprusian (Cypruese?)

Well I've done some digging, the German plan was a levy on accounts over 100,000 Euros.

I will also point out, the Cyprus banks and government didn't really do anything wrong that I can find. Cyprus's budget was balanced before 2008, the banks were in the black. What they did do is buy alot of debt. A good chunk of it Greek debt. The debt that got a haircut. Which I guess makes this an example of why the EU cannot simply wave a magic wand and make the Greek debt go away. It would be murderous on the banking industry, which is currently a big industry... Even in Germany, currently the European homeland of manufacturing.

Something tells me that the EU and Greece became less popular in Cyprus.

Josh wrote:Yeah, but the consequence is that everyone who had stashed their cash there will then pull out and find a more secure haven, leaving Cyprus in the mud.

So then you call that the risk of being an offshore tax haven, I guess.

A senior lawmaker told Reuters the Cyprus model may not be an isolated case, and is perhaps a future template in dealing with troubled European banks.

The new template is now likely to turn into a full-scale EU law, letting taxpayers off the hook in case a bail-out is needed, but imposing major losses on bigger savers on a permanent basis.

"You need to be able to do the bail-in as well with deposits," said Gunnar Hokmark, member of European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks, Reuters reported.

"Deposits below 100,000 euros are protected ... deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in," Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed the idea.

The European Commission has written the draft of the law, which now awaits approval from eurozone member states and the parliament on whether and when it can be implemented. It's been reported, the law is planned to take effect in the beginning of 2015.

"What we've done last night is what I call pushing back the risks," Dijsselbloem told Reuters and the Financial Times hours after the Cyprus deal was struck Monday.

After speaking to reporters, news outlets prolieferated Disselbloem's 'Cyprus as a template' commentary, which sent markets into a spook and tanked many trading indexes. Analysts took the rhetoric as a signal Cyprus was not a unique case, and other Euro economies, could be next.

Now Dijsselbloem is eating his words and defended himself saying he doesn't even know the English word 'template', but he was simply describing the process itself.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.

Though the word 'template' wasn't explicitly used, his comments still indicate he doesn't think Cyprus is a one-time deal.

The International Monetry Fund and German officials back the new template and see it as a more sustainable approach to battling the sovereign debt problems that spread like a virus in financially weak members of the eurozone.

Economist Yanis Varoufakis believes the situation in the rest of the eurozone is not looking good after the “basic principle” of a banking union and solidarity throughout the eurozone has been jeopardized.

“As long as even a small probability of losing their money is present and persistent, the capital flight from the periphery to the core of the eurozone is going to continue unabated and this is going to constantly undermine the integrity of the eurozone,” Varoufakis told RT. “Suppose you are a depositor in Spain… Even if there is a small probability in your mind that something similar could happen with your insolvent Spanish bank, and they are insolvent after all, why would you keep money in your Spanish bank account and not transfer it to Frankfurt, to Deutsche bank, let’s say? There is no reason why you shouldn’t transfer it to Germany.”