* After "scorched earth", island left with ashes *
Savers in Cyprus are being forced to bear the brunt of a painful cost of a 10 bln euro bailout agreed by eurozone partners and the IMF early Saturday in Brussels, with 6 bln raised from a haircut on bank deposits, something the new government headed by Nicos Anastasiades said would never happen.
The rescue agreement, something the previous communist administration refused to deal with from the summer of 2012, accused by the then-opposition of leaving behind "scorched earth", will see depositors giving up 6.75 to 9.9% of their savings, for amounts below and above 100,000 euros, half of which is said to be in Russian hands.
The "bail-in" has long been the demand of Germany and Holland that have been upset from the size of the Russian deposits in Cyprus, saying they refused to bailout funds from suspicious sources from oligarchs and money laundering, even though these deposits are a fraction of criminal funds safely deposited in banks in Germany and the U.K.
Cypriots were furious with the decision which EU officials admit was aimed to stave off bankruptcy despite the risks of a wider bank run.
"I wish I was not the minister to do this," Cypriot Finance Minister Michael Sarris said after ten hours of late-night talks where euro zone finance ministers agreed the package.
"Much more money could have been lost in a bankruptcy of the banking system or indeed of the country," he said, adding that he hoped a levy and bailout would mark a new start for Cyprus.
Without a rescue, Cyprus would default and threaten to unravel investor confidence in the euro zone that has been fostered by the European Central Bank's promise last year to do whatever it takes to shore up the currency bloc.
The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks that were hit by a sovereign debt restructuring in Greece. The 'Troika' of negotiators from the EU, ECB and IMF also want the government to sell some of its excess assets and privatise seven state services in order to pay down a runaway public sector deficit due to a rigid civil service.
The levy on bank deposits will come into force on Tuesday, after a bank holiday on Monday. Cyprus will take immediate steps to prevent electronic money transfers over the weekend.
"As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders," Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting in Brussels, told reporters.
Such levies break the taboo of hitting bank depositors with losses, but Dijsselbloem said it would not have otherwise been possible to salvage its financial sector, which is around eight times the size of the economy.
"We are not penalising Cyprus… we are dealing with the problems in Cyprus," Dijsselbloem said, an argument that has been far from convincing in Cyprus, suggesting the Dutch official has alterior motives. He said that under the programme, the island's debt would fall to 100% of economic output by 2020.
In return for emergency loans, Cyprus agreed to increase its corporate tax rate by 2.5 percentage points to 12.5%.
This should boost Cypriot revenues, limiting the size of the loan needed from the euro zone and keep down public debt.
RUSSIAN AID
IMF Managing Director Christine Lagarde, who attended the meeting, said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.
"We believe the proposal is sustainable for the Cyprus economy," she said. "The IMF is considering proposing a contribution to the financing of the package… The exact amount is not yet specified," Lagarde said.
Cyprus, with a GDP of barely 0.2% of the bloc's overall output, applied for financial aid last June, but negotiations were stalled by the complexity of the deal and reluctance of the previous president Demetris Christofias to sign.
Moscow, which has close ties with Nicosia, is likely to help by extending a 2.5 bln euro loan already made to Cyprus by five years to 2021 and reducing the interest rate.
"We have had contacts in recent weeks with the Russian government," said the EU's top economic official Olli Rehn.
"My understanding is that the Russian government is ready to make a contribution with an extension of the loan and a reduction of the interest rate," said Rehn, who is responsible for economic affairs at the European Commission, the EU executive.
Cyprus' finance minister Sarris will travel to Moscow for meetings on Monday to try to pin down the new loan terms. He is also expected to discuss funding opportunities from investors who might be interested to take control of the second largest lender, the Cyprus Popular Laiki Bank, that was nationalised with a state rescue of 1.79 bln euros last year.
Cyprus originally estimated it needed about 17 bln euros – almost the size of its entire annual output – to restore its economy to health.
But because a loan of that magnitude would increase its debt to unsustainably high levels and call into question its ability ever to pay it back, policymakers sought to reduce it by finding more revenue sources in Cyprus itself.
The bailout package will also include higher taxes on dividends and capital gains, which could turn foreign depositors and investors away from Cyprus, ultimately reducing chances of higher state revenues.
