THE DECISION to impose an unprecedented all-out haircut on Cypriot deposits was a painful one, but it was the only option to avoid bankruptcy of the state, said President Nicos Anastasiades yesterday.
The statement was made after Cyprus woke up to a horrific hangover yesterday morning when it transpired after a marathon ten-hour Eurogroup session that a haircut on all bank deposits would be imposed in Cyprus, along with an increase in corporate tax and a doubling of the tax on interest earned from savings.
The tradeoff was reaching political agreement on a Cyprus bailout to the tune of €10 billion, around €7 billion less than initially estimated, with the participation of the IMF. The loan, unlike the haircut on deposits, will be paid back in cash.
Overnight, what was previously declared a red line by Anastasiades and Finance Minister Michalis Sarris became a reality. For the first time in the eurozone, a haircut would be imposed, not on state creditors or bondholders, but on everybody with savings in Cypriot-based banks, including small depositors with less than €100,000 in the bank. The move is expected to raise €5.8 billion for which depositors would receive bank equity in return.
Ironically, throughout the EU, deposits with less than €100,000 are insured by the state, meaning should the banks collapse before the levy is imposed, depositors’ savings- in theory- would be secured.
This is the fifth aid package prepared by the troika- and the smallest- but the only one where depositors take a hit, largely due to the insistence of Germany and the IMF.
The deposit levy - set at 9.9 percent on bank deposits exceeding €100,000 and at 6.75 per cent on anything below that - will take place on Tuesday after the bank holiday on Monday.
To avoid a bank run, electronic transactions were frozen while the Cooperative Movement forced its branches, which are usually open on Saturdays, to close.
Apart from forcing losses on depositors, the Eurogroup, led by Dutch finance minister Jeroen Dijsselbloem and under the clear direction of his German counterpart Wolfgang Schaeuble and IMF chief Christine Lagarde, also secured an increase in Cyprus’ corporate tax rate by 2.5 per cent to 12.5 percent, and an increase in the tax on interest on savings by 20-25 per cent.
The euro ministers argued this should boost revenues, limit the size of the loan needed from the eurozone and keep down public debt.
“The solution chosen may be painful, but it was the only one that would allow us to continue our lives without adventures. It's a decision that leads to the historic and permanent rescue of our economy,” Anastasiades said in a written statement.
The president highlighted that the Cypriot delegation was caught unawares, finding itself before a fait accompli during the extraordinary Eurogroup meeting on Friday night.
“We faced decisions that had already been taken and came across faits accomplis through which we were faced with the following dilemmas:
“On Tuesday, March 19, we would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis, which would put a definitive end to the uncertainty and restart our economy.”
Anastasiades said the consequences of rejecting the deal would be the collapse of the Popular Bank because the European Central Bank had already decided to cut its emergency liquidity while Bank of Cyprus would not have been able to avoid the same fate.
“This would have lead 8,000 families to unemployment from one moment to the next,” the president said.
A collapse of the banking sector could have led to an exit from the eurozone and a devaluation of the island’s currency by at least 40 per cent, he said.
Never mind the lost deposits and the billions that the state would have to pay in compensation, he added.
“It is well known that the deep economic crisis and the state of emergency we are in did not come about in the last 15 days when we assumed the country’s administration,” said Anastasiades. But “the severity of the situation does not allow me, and anyone else, to engage in a blame game.”
Instead, the president said he chose a controlled management of the crisis by ensuring the liquidity of the banks and the rescue of the banking system through their recapitalization; saving deposits apart from the levy for which depositors will get shares in the island’s two main banks; saving provident and pension funds and avoiding wage and pension cuts.
He also argued that the current decision will avoid further recession and the risk of a vicious cycle leading to a second memorandum.
Anastasiades returned to Cyprus last night where he planned to meet with party leaders at the presidential palace and later the heads of commercial and cooperative banks.
This morning, the cabinet will meet to discuss draft bills emanating from the Eurogroup decision, while the president will also meet with the House Finance Committee before addressing parliament and the nation at 11.30am.
Parliament will hold a plenary session in the afternoon where they will be expected to pass the legal amendments necessary to implement the Eurogroup decision.
Speaking to state broadcaster CyBC, government spokesman Christos Stylianides said yesterday that the Cypriot delegation came under immense pressure on the issue of a haircut, with Schaeuble and Lagarde initially demanding a 40 per cent cut on deposits.
He confirmed reports that Anastasiades twice threatened to walk out from the talks until cooler heads prevailed and Germany and the IMF brought their initial double-digit figure down.
“The situation is serious but not tragic and there is no reason to panic,” he added.
Speaking at a press conference after the long negotiations, Sarris said Cyprus chose the least painful solution.
“We have managed to avoid any tax on financial transactions that would be catastrophic for our economy,” he said.
“We believe this was an historically difficult decision, despite its harsh aspects, which averts the disorderly bankruptcy of our country, restores confidence and gives us the opportunity to proceed decisively towards a new beginning,” he added.
As depositors and banks sobered up to the news, the search began to understand why Cyprus should be the first country in the eurozone to force small depositors to contribute a part of their savings to save the banks and help stabilise Europe’s monetary union.
Economist Alex Apostolides yesterday argued the decision will have repercussions not just for Cyprus but the eurozone as a whole as it raises huge doubts about the safety of deposits in the eurozone, especially in countries facing serious fiscal pressures.
The basis of any successful capitalist economy is the protection of the right of personal property, he said. “This decision to punish all savers equally across all banks, regardless of the bank’s solvency, violates this principle,” he added.
According to the Cyprus News Agency, during the ten-hour marathon session, the government had to utilise its connections with other prominent German politicians in an effort to temper Schaeuble’s hard line on a substantial deposit haircut.
At one point, during the game of brinkmanship, one official reportedly told the Cypriot delegation that if they don’t agree, they can get ready for one of their banks to collapse the next day.
Speaking to CNA, German media representatives said the tough line followed by Berlin was likely as a result of the negative climate surrounding a Cyprus rescue package and the difficulty of getting any deal through the German parliament.
For months now, German media, citing German intelligence reports, argued that any rescue package would mainly help save Russian deposits, despite the fact that the majority of deposits are held by non-Russians.
In a statement issued yesterday, Lagarde welcomed the agreement reached to address Cyprus’ economic challenges.
“The IMF has always said that we would support a solution that is sustainable, that is fully financed, and that appropriately allocates the burden sharing. I believe that the agreed package meets these three objectives,” she said.
Dijsselbloem argued that without the deposit levy it would not have been possible to save Cyprus’ financial sector which, compared with national economic output, is more than twice as big as the EU average.
“As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders,” he said.
President Nicos Anastasiades looking tired and defeated on his way into the palace last night