Depositors will lose up to 10 percent of their savings as part of a €10 billion bailout for Cyprus agreed on Friday (15 March)
The Mediterranean island will become the fifth eurozone country to receive a rescue package after eurozone ministers reached agreement following all-night talks on Friday (15 March).
However, in a departure from all previous rescue packages, people with Cypriot bank accounts will share in the pain.
People with less than €100,000 face a 6.75 percent levy, while those with more will pay 9.9 percent.
The one-off tax is expected to raise €5.8 billion.
Speaking with reporters after nearly 10 hours of talks, Dutch finance minister Jeroen Djisselbloem, who chairs the Eurogroup, commented that “as it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders.”
He added that the “unique measure” was needed to trim the size of the Cypriot banking sector, describing it as “justified, in terms of burden sharing, to also involve the depositors.”
The final bailout figure is significantly below the €17.5 billion previously estimated by Cyprus.
Djisselbloem said that the smaller bailout package would enable Cyprus to reduce its debt pile below 100 percent of GDP by 2020.
The Cypriot bank sector is on the verge of collapse, with assets and liabilities worth nearly €120 billion – almost eight time the size of the island’s annual GDP.
The banks also took a €4.5 billion hit as a result of the haircut imposed on private holders of Greek debt in 2012.
Cyprus opened talks on a rescue package last summer, but negotiations stalled after the outgoing Communist President Demetris Christofias refused to sign off a deal.
The bailout talks were also complicated by allegations that Cypriot banks have laundered money for Russian oligarchs.
There is an estimated €20 billion from Russian depositors in Cypriot banks.
Moneyval, an audit body connected to the Strasbourg-based Council of Europe, is expected to produce a report on the issue later this month.
Meanwhile, Russia is expected to play its part by extending the maturity date of a €2.5 billion loan to 2021.
EU economic affairs commissioner Olli Rehn noted that Moscow is “ready to make a contribution with an extension of the loan and a reduction of the interest rate.”
Cypriot finance minister, Michalis Sarris, said that he agreed to the package reluctantly.
“I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” he said.
“The system did not leave us with any options,” he added.
In a bid to prevent investors trying to take their money out of Cyprus, Sarris revealed that it is no longer possible to make large bank withdrawals.
For her part, International Monetary Fund chief Christine Lagarde also backed the deal. She indicated that the IMF is likely to make a contribution, but she said “the exact amount is not yet specified.”