Cyprus agrees key parts of deal to get €10bn bailout
AN EU diplomat says Cyprus and its international creditors have agreed on the key elements of a deal that paves the way for the nation to receive a €10bn bailout.
The European Union diplomat said early this morning that Cyprus's second-largest bank, Laiki, will be restructured and holders of bank deposits of more than €100,000 will have to take losses.
It was being reported last night that a levy of up to 40pc could be place on these deposits.
Making large depositors take a hit is expected to net several billion euros, thus reducing the amount of rescue loans the country needs.
He said the agreement between Cyprus, the International Monetary Fund and the European Commission still needs approval by the 17-nation eurozone's finance ministers.
The draft proposal, which will go before eurozone finance ministers for approval today, would save the Mediterranean island from financial meltdown by winding down Popular Bank of Cyprus , also known as Laiki, and shifting deposits below €100,000 to the Bank of Cyprus to create a "good bank".
A senior source involved in the talks said Cypriot President Nicos Anastasiades had threatened to resign at one stage if he was pushed too far. A first attempt at a deal collapsed last week when the Cypriot parliament rejected a proposed levy on all deposits.
EU diplomats said the president, flown to Brussels in a private jet chartered by the European Commission, had fought to preserve the country's business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons.
As Europe wakes up to another crisis hangover, two things are clear: the reputation of Cyprus as a player in the financial services sector has been damaged, while the bonds of European solidarity have been further frayed.
Cyprus' central bank last night imposed a daily withdrawal limit of €100 from ATMs of the country's two largest lenders, Bank of Cyprus and Laiki, to prevent a bank run by depositors worried about their savings.
Laiki had already imposed a limit of €260 after its ATMs were inundated by alarmed customers. All Cypriot banks have been shut for the past week, but ATMs have been disbursing money.
The latest talks have left Cyprus isolated, and infuriated other small countries dependent on financial services such as Luxembourg and Malta.
In barbed remarks that highlighted how trust is evaporating, Luxembourg took aim at Germany yesterday, saying not every European country could export cars and weapons.
Cyprus had been told it must reach a deal by today to avert a collapse of its banking system and get the €10bn bailout after a first attempt collapsed last week.
A threat by the European Central Bank (ECB) to cut off emergency financing for the island's tottering banks today left Cyprus with the stark choice of bowing to the creditors' aid conditions or heading towards a disorderly default.
Finance Minister Michael Noonan had earlier predicted that a deal was likely. "I think it will be done tonight, but I think it will be late," he said.
The key unresolved issues on the bailout deal were how Cyprus should raise €5.8bn from its banking sector towards its financial rescue. The only real answer on the table was a levy on deposits over €100,000.
Analysts warned that failure to clinch a deal could cause a wider financial market sell-off, but some say the island's size -- it accounts for 0.2pc of the eurozone's economic output -- means contagion would be limited.
The probable levy on bank deposits represents an unprecedented step in Europe's handling of a debt crisis.
European governments have wrangled over aid for Cyprus for nine months, exposing holes in the euro's revamped economic management system that was built, piece by piece, since Greece's ballooning deficit triggered the crisis in late 2009.
In Nicosia yesterday, hundreds of people marched to the country's parliament before a rally outside the EU's offices nearby. A rescue plan agreed last weekend fell because of opposition to a levy on all accounts above €20,000.
The move to tax large depositors would disproportionately affect big Russian investors in the country.
Irish lawyer Thomas Keane, who represents several Russian companies with investments in Cyprus, said it could lead to at least €9bn being withdrawn and moved elsewhere.