Mediterranean island avoids public sector cuts

Cyprus receives $13bn bailout from European troika

GMT 17:43 2013 Saturday ,16 March

Arab Today, arab today Cyprus receives $13bn bailout from European troika

Cyprus becomes the fifth eurozone member to be saved from bankruptcy
Brussels – Arabstoday

Cyprus becomes the fifth eurozone member to be saved from bankruptcy Brussels – Arabstoday Eurozone finance ministers and the International Monetary Fund (IMF) on Saturday agreed on a €10bn ($13 billion) bailout deal for Cyprus, the fifth eurozone member to be saved from bankruptcy. The debt rescue package, which was agreed after some 10 hours of talks in Brussels, is significantly less than the €17bn Nicosia had initially requested.
Under the deal, diplomats said all bank deposits in Cyprus would be hit with a one-off, unprecedented "levy" of up to 9.9 percent, depending on the amounts held.
At the same time, a "withholding tax" will be imposed on interest on bank deposits, in a further hit for private investors in the Cypriot banking system.
Monday is a bank holiday in Cyprus so it will be Tuesday before depositors will be able to react.
Cyprus Finance Minister Michalis Sarris said his country's parliament would on Sunday vote on the introduction of the bank levy.
The rescue talks, attended by Cyprus President Nikos Anastasiades, had dragged on as the Cypriot government fought its ultimately doomed battle to avoid a "bail-in" or haircut, which it argued would trigger a run on its banks and ricochet on through the wider eurozone financial system.
Cyprus -- which accounts for just 0.2 percent of the combined eurozone economy -- has become the latest country to secure a debt rescue package from its eurozone partners in the three-year debt crisis.
The price tag is very small compared with two rescues for Greece worth some €380bn ($496bn), Ireland's €85bn, Portugal's €78bn and €41bn for Spanish banks.
"It's something that compared to other possible outcomes, is the least onerous," Sarris said about the deal, adding that the arrangement meant his government "avoided salary and pension cuts" for public sector workers.
Intended to apply to everyone from pensioners to Russian oligarchs alleged to have billions stashed away in what officials say is a bloated Cypriot banking sector, the proposed bank levy immediately raised concerns among finance experts over a possible bank run in bigger eurozone economies, where fragile public finances are also under scrutiny.
Dutch Finance Minister Jeroen Dijsselbloem, after chairing the talks with counterparts including IMF head Christine Lagarde and the European Central Bank's Mario Draghi, said the "upfront, one-off" tax is expected to raise €5.8bn on top of the loans still to be finalised by eurozone parliaments.
The levy will see deposits of more than €100,000 in Cypriot banks hit with a 9.9 percent charge when lenders re-open their doors on Tuesday. Under that threshold the levy drops to 6.75 percent.
Top ECB official Joerg Asmussen said the only way to drive down the rescue was to claw back money from the Cypriot banking sector, which is estimated to hold assets worth five times the country's economic output.
"In order to have burden-sharing, you extend the tax base," Asmussen said. "To residents and also to non-residents."
Lagarde said she would recommend that the IMF board now agree to chip in what one diplomat said could amount to another billion euros ($1.3bn) in loans.
Lagarde said "the exact amount is not yet specified and will take a little bit of time" to arrive at.
Officials including the EU's economy and euro commissioner Olli Rehn also cited "positive" parallel talks with Russia on possibly easier terms on a €2.5bn loan it gave to the Cypriot government.
According to an EU diplomatic source, Sarris is set to visit Moscow on Wednesday, RIA Novosti news agency reported, for expected talks about extending that loan, due to be repaid in 2016.
Russians are among the biggest investors in Cyprus, and hardline lenders like Germany had pressed for months for a clampdown on banks' alleged involvement in money laundering.
Under the new bailout deal, the Cyprus government will also have to hike corporate tax to 12.5 percent from 10 percent and sell off state assets so as to help balance the public finances.
"As it is a contribution to the financial stability of Cyprus, it seems 'just' to ask a contribution of all deposit-holders" to the rescue, Dijsselbloem said.
"The challenges we were facing in Cyprus were of an exceptional nature," the Dutchman added, under tough questioning from journalists at a press conference after the meeting in Brussels.
"We did what we had to," said French Finance Minister Pierre Moscovici on exiting the talks.
The total annual output of the Cypriot economy is €17bn, and the IMF was concerned that a bailout on that level would take the country's debt burden to unsustainable levels.

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