PARIS — After striking an unprecedented deal in March to make many bank depositors help pay for an international bailout, Cyprus on Monday received €2 billion, the first installment of that money, aimed at buttressing the economy after the near-collapse of its banking sector.
European officials say the release of the funds, equivalent to $2.6 billion, was recently approved by a working group of the 17 euro zone finance ministers, who gathered Monday evening in Brussels for their regular monthly meeting. Cypriot efforts to stabilize the economy may be on the agenda. A second allocation of up to €1 billion will be transferred by June 30, officials said.
That session was a prelude to the planned meeting Tuesday of all 27 European Union finance ministers, where the focus is expected to be on proceeding with a European banking union that could stabilize the financial system and avoid future debacles like the one in Cyprus. Officials on Tuesday were to consider a single set of rules for dealing with failing banks throughout Europe, as well as discuss continuing efforts to curb tax havens.
The thorniest issue revolves around whether depositors in any other European country should be made to suffer losses if their banks require an international rescue, as happened in Cyprus in an unprecedented and still controversial provision for a euro zone bailout.
In exchange for a €10 billion emergency aid package, Cyprus in March agreed to E.U. demands to effectively confiscate up to 60 percent of any depositor’s holdings above €100,000 held in two of the country’s largest banks, Bank of Cyprus and Laiki Bank. At the same time, Laiki Bank was forced to fold, merging into the Bank of Cyprus.
On Tuesday in Brussels, part of the debate will involve where depositors should be placed in the hierarchy of creditors in the future rules on shutting down failing banks. The main focus is what to do with depositors holding more than €100,000. Some countries want all E.U. members to have the same rules, while others want the flexibility to decide where savers should be in the hierarchy.
The president of the European Central Bank, Mario Draghi, said at his recent monthly news conference that ordinary depositors should be affected only after people who took risks by buying bonds in banks were forced to take losses. “If it can be avoided,” he said, “uninsured depositors should not be touched.”
In Cyprus, the issue came to a head after Germany and some other E.U. countries insisted on finding a new way to pay for a bailout of troubled Cypriot banks, which held large deposits from wealthy Russians. There were questions about the origins of some of the money, meaning it would be hard for Berlin to justify using German taxpayer funds to clean up Cyprus’s mess. In the end, E.U. and Cypriot officials agreed that wealthy depositors would effectively have to help foot the cleanup bill.
The president of the Cypriot central bank, Panicos Demetriades, said last week that most of the depositors who lost money under the deposit-seizure system were foreigners. “Seventy percent of the value of the deposits concerned overseas residents, leaving Cypriot households and businesses unaffected to a greater extent than was possibly expected,” he said at a news conference.
Cypriot and Brussels officials had abandoned an earlier, even more controversial plan to skim a percentage of insured deposits — those under €100,000 in Cypriot banks. They pulled back that proposal after it set off tremors in global financial markets and raised the specter of a run on euro zone banks because of concerns that even insured deposits might not be safe.
It was still in an emergency atmosphere, though, that Cyprus imposed capital controls in March to prevent a flood of money from leaving banks operating there. Those restrictions have been eased gradually since then, but remain in place for all but a handful of foreign banks, despite initial promises by the government that the strictures might be quickly removed.
The entire episode has dealt a sharp blow to the Cypriot economy.
With restrictions on how much money individuals and businesses can withdraw or transfer from their Cypriot bank accounts, spending has been sharply curtailed. The economy, already in recession, is expected to contract at least 12.5 percent in the next two years. Unemployment, at 12 percent, is forecast to rise as the shrinking of the outsize banking system, demanded by Cyprus’s creditors, curtails lending and leads to job losses.
The bailout has also set off geopolitical tension over a trove of natural gas recently found in Cypriot waters, which the country’s creditors hope could be tapped in the future to help pay off the country’s loans. Last week, the E.U. commissioner for economic and monetary affairs, Olli Rehn, pressed for the four-decade-old division of Cyprus into Greek and Turkish territories to be abolished, saying reunification would give Cyprus a “major boost to economic and social development.”
Such a move could also pave the way for faster exploration of extensive natural gas reserves off the coast of Cyprus, which Turkey, Russia and the European Union are all interested in pursuing.
Cyprus has been divided since 1974, after Turkey invaded the north. Turkish officials have warned the Cypriot government in recent months not to proceed with gas extraction unilaterally, saying it would risk further inflaming political tension with Ankara.
James Kanter contributed reporting from Brussels.
Article source: http://www.nytimes.com/2013/05/14/business/global/Cyprus-Gets-First-Tranche-of-Bailout-Funds.html?partner=rss&emc=rss
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