Cash-strapped Cyprus secured a $13-billion bailout package from its European partners and the International Monetary Fund in a bid to prevent the island nation from entering a bankruptcy that could rekindle the region’s debt crisis, officials said early today.
In a major departure from established policies, the package foresees a one-time levy on the money held in bank accounts in Cyprus.
Analysts have warned that making depositors take a hit threatens to undermine investors’ confidence in other weaker Eurozone economies and might possibly lead to bank runs.
In return for the rescue loans, Cyprus will trim its deficit, significantly shrink its troubled banking sector, raise taxes and privatise state assets, said the Netherlands’ Jeroen Dijsselbloem, president of the Eurogroup meetings of the 17-nation Eurozone’s finance ministers.
“The assistance is warranted to safeguard financial stability in Cyprus and the Eurozone as a whole,” he said, briefing presspersons after almost 10 hours of negotiations.
People with less than 100,000 Cypriot pounds in their Cypriot bank accounts will have to pay a one-time tax of 6.75 per cent, those owning more money will lose 9.9 per cent. The measure will be carried out early next week and is expected to net 5.8 billion Cypriot pounds in additional revenues, Dijsselbloem added, thereby greatly reducing the country’s financing need.
“We found it justified in terms of burden sharing to also involve the depositors,” said Dijsselbloem, noting that it was a “unique measure” because of Cyprus’ outsized banking system.
“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem added.
Analysts have warned that imposing such a drastic measure could be seen as a watershed moment, undermining the Eurozone’s credibility. Although, the leaders stressed the levy was a unique measure for Cyprus, they said the same when private holders of Government bonds were forced to accept losses in Greece.