19 March 2013

FT: Cyprus scrambles to renegotiate bailout

Cypriot authorities scrambled to renegotiate the terms of a €10 billion bailout by moving to scrap its controversial levy on small account holders and instead seizing more from larger depositors and businesses.

Cypriot banks were ordered to stay closed for two more days to avoid a bank run, as the government delayed for the second day running a parliamentary vote on the deal struck with eurozone officials and the International Monetary Fund.

A senior EU official said international lenders were pushing the Cypriot government to exempt all deposit holders below €100,000. Instead, the IMF, the EU and the European Central Bank wanted a levy of 15.6 per cent on all deposits above that level, many of which are held by Russians.

The demands by smaller political parties to scrap the 6.75 per cent levy on smaller accounts has pushed the newly-elected Cypriot president into a corner, squeezed between his outraged electors and his country’s most important economic client.

The backlash against the bailout threatens to rekindle the market turmoil that has subsided for the last seven months of the three-year-old eurozone crisis.  It marks the first time in the history of the five EU-led eurozone rescues that depositors have been forced to contribute, raising fears it could be repeated elsewhere – something EU officials vehemently deny.

If Mr Anastasiades is unable to pass the bailout through parliament, EU officials have warned him he faces a collapse of the country’s two largest banks. In an attempt to win over the handful of votes needed, he suggested lowering the rate on smaller depositors to 3 per cent while those with over €500,000 would lose 15 per cent. Those in between would get a 10 per cent cut.

But it appeared unlikely the new structure would win sufficient support unless smaller depositors were completely exempt. There were also questions whether Cyprus could legally exempt any class of savers under the country’s tax treaties, senior officials said.

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