SCORCHED EARTH: The Cyprus bailout, cut on deposits, not current accounts

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Euro zone ministers struck a deal on Saturday to hand Cyprus a bailout worth 10 bln euros ($13 bln) to stave off bankruptcy. Under the programme, the island's debt should fall to 100% of economic output by 2020, much more sustainable from the previous estimates of 120% and 140%.

Here are the outlines of the financial package:

– Nicosia will impose a 9.9% one-off levy on deposits above 100,000 euros in Cypriot banks and a tax of 6.75% on smaller deposits from March 19. The levy will generate 5.8 bln euros. There is no mention of a levy on current accounts.

Depositors will be compensated by equity in the banks. A similar fate may also be reserved for some 2 bln euros worth of bond holders who had been duped by Bank of Cyprus and Cyprus Popular Laiki Bank to buy the unsecured instruments.

There will also be a tax on interest that the deposits generate. From the current 15% it will probably rise to 30%.

– Cyprus has agreed to increase its nominal corporate tax rate by 2.5 percentage points to 12.5%, which could bring in up to 200 mln euros a year. However, this could also turn out to be a double-edged sword, as higher rates could push companies beyond Cyprus shores, resulting in lower revenues for state coffers.

– The IMF is expected to contribute to the rescue package, but the amount is still to be determined. It has also not said when it will cointribute the funds.

– Russia will likely help finance the programme by extending a 2.5 bln euro loan already made to Cyprus by five years to 2021 and reducing the interest rate, which is now at 4.5%.

– Cyprus may be required to privatise the Cypriot telecoms company Cyta, the electricity company EAC and the ports authority, which combined have assets worth 4 bln euros. Four more government owned services may also be privatised.

– Cyprus will have to downsize its banking sector, reducing it to the EU average by 2018. The size of the banking sector in Cyprus is more than eight times the size of the economy, compared to around 3.5 times in the EU.