The Eurogroup seems to have had a change of heart and is willing to give Cyprus more flexibility over a bank levy which is part of its strict bailout conditions, sources said on Monday after a teleconference of euro zone finance ministers.
The decision was prompted by acute reactions in world markets that punished the European common currency and some of the continent’s leading bank stocks after weeks of steady gains were wiped out by fears of the European Union violating the minimum guarantee on deposits agreed after the Lehman collapse in 2008.
The Eurogroup now suggests that depositors in Cyprus with less than 100,000 euros ($129,600) should be protected, a turnaround from the harsh conditions imposed on Friday night that included a “bail in” 6.5% levy on all deposits up to 100,000 euros and 9.9% on savings of more than the threshold amount. This has already upset Russian savers who account for about a third of the 68 bln euros of deposits in an economy of 72 bln euros in loans. But the Russians have also been targeted by the likes of German “iron fist” finance minister Wolfgang Schauble who sees every Russian depositor as an oligarch or money launderer.
However, Cyprus should still raise 5.8 bln euros from the levy as planned, probably imposing a proportionally higher rate on deposits of more than 100,000 euros, as well as a hike on the competitive corporate tax rate from 10% to 12.5%. Privatisations of unproductive government services may also need to be speeded up to help bring a runaway public sector deficit under control.
The Cypriot parliament is expected to vote on the rescue package on Tuesday afternoon, but opposition to a harsh bailout deal could jeopardise the vote with president Nicos Anastasiades, just 15 days in office, losing allies among deputies and facing a default, despite being elected on the promise of a bailout deal his communist predecessor refused to negotiate.
The finance ministers said on Monday they favoured a higher, 15.6% hit for richer savers, so more modest accounts could be spared and the international lenders, including the IMF, would release 10 bln euros in rescue funds, while the European Central Bank would release about 5 bln euros in emergency liquidity.
"All Eurogroup ministers said today they wished there was no tax below 100,000 euros but you can't force a country to not do that," the Greek finance ministry source was quoted by Reuters as saying.
"Cyprus doesn't want to impose a large tax above 100,000 because the money will flow out. Two thirds of deposits are from abroad."
The decision to target bank accounts stunned Cypriots, and police sealed off parliament as about 400 people staged a noisy protest outside, aggrieved that their small island of one million people should be singled out for such treatment.
Residents emptied cash machines over the weekend and investors feared a precedent had been set that could reignite turmoil in the single currency area that the ECB has calmed in recent months with its pledge to do whatever it takes to save the euro.
Banks, shut on Monday for a bank holiday, will remain closed on Tuesday and Wednesday to avert any panic.
"It is up to the government alone to decide if it wants to change the structure," ECB policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, told reporters in Berlin. "The important thing is that the financial contribution of 5.8 billion euros remains."
On the streets of Nicosia, ordinary Cypriots blamed European leaders, especially German Chancellor Angela Merkel. Protesters had inked the word "No" on the palms of their hands. "Europe is for its people and not for Germany," one placard said.
"They are treating us like guinea pigs," said Takis Georgiou, 49. "The government has lost its credibility in the eyes of the people. We'd be better off leaving the euro and returning to the pound, we don't want to end up like Greece."
"The most important question is what would happen the following day if the bill isn't voted," Cyprus central bank governor Panicos Demetriades told parliament.
"What would certainly happen is that our two big banks would need to be consolidated. This doesn't mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way."
Brussels has emphasised that the measure is a one-off for a country that accounts for just 0.2% of European output.
The worst fear is that savers in other, larger European countries become nervous and start withdrawing funds, although there was no immediate sign of that on Monday.
"If I were a saver, certainly in Spain or maybe Italy, I think I'd be looking askance at these measures and think this could yet happen to me," said Peter Dixon, global financial economist at Commerzbank.
Cyprus's banking sector dwarfs the size of its economy and has been severely hurt by exposure to its much larger neighbour Greece.
Moscow is considering extending an existing 2.5 billion euro loan to help bail the island out and said the fact it had not been consulted about the bailout could come into play.
President Vladimir Putin criticised the bank levy as setting a dangerous precedent.
"Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous," Kremlin spokesman Dmitry Peskov told reporters.
Get all the latest news and videos in your inbox. Register FREE