May 31, 2020

After Negotiations, Cyprus Agrees to a Euro Zone Bailout Package

BRUSSELS — Cyprus reached a long-awaited bailout agreement early Saturday that puts some of the burden for shoring up the island’s beleaguered economy on its bank depositors.

The most contentious issue in months of negotiations was whether to force Cypriot depositors to take losses in order to make the country’s debt more manageable. The Cypriot authorities had sought to head off any such initiatives on the grounds that they would do lasting damage to their financial services sector.

In the early hours of Saturday morning, after 10 hours of talks, finance ministers from euro area countries, the International Monetary Fund and the European Central Bank agreed on terms that include a one-time tax of 9.9 percent on Cypriot bank deposits of more than 100,000 euros, and a tax of 6.75 percent on smaller deposits, European Union officials said..

“It’s not a pleasant outcome especially for the people involved,” Michalis Sarris, the Cypriot finance minister, told reporters. “This is a once and for all levy,” he added, saying it should ensure no further flight of depositors from Cypriot banks.

Jeroen Dijsselbloem, the president of the group of ministers, told a separate news conference that lenders had reached “a political agreement” to aid Cyprus. The challenges to reaching a deal were “of an exceptional nature,” he said.

The latest bailout for the euro zone broke new ground by requiring haircuts, or losses, for all Cypriot bank depositors. A previous bailout for Greece required a significant haircut for Greek bondholders in early 2012 — something that European Union officials said at the time would be a one-of-a-kind measure.

Mr. Dijsselbloem declined to rule out taxes on depositors in other countries besides Cyprus in the future, but insisted that such a measure was not being considered. He said the tax would generate 5.8 billion euros.

Going into the meeting, finance ministers sought to limit the overall costs of the rescue plan while Christine Lagarde, managing director of the I.M.F., pushed for a deal that is generous enough to enable Cyprus eventually to pay the money back.

The Cypriot authorities wanted a plan that ensures that the island remains attractive to investors, who include many Russians with large deposits in the country’s banks.

Ms. Lagarde was blunt about the need for ministers to agree to a realistic package of measures. “All I know is that we don’t want a Band-Aid,” she said. “We want something that lasts, something that is durable and that will be sustainable.”

The key to a breakthrough was finding a way to bring down the bailout package, estimated at 17 billion euros ($22.2 billion). That amount is small compared with the rescue deal for Greece, but represents almost as much as Cyprus’s gross domestic product, which is about 18 billion euros.

The deal that emerged on Saturday morning was for a bailout of up to 10 billion euros, Mr. Dijsselbloem said.

Cyprus asked for the bailout in June last year. But talks faltered when the former president Demetris Christofias, a Communist, balked at measures like privatizations. The talks sped up after the election last month of Nicos Anastasiades of the Democratic Rally, a center-right party, to the presidency.

Some of the other elements of the deal involved Cyprus raising its low corporate tax rate to 12.5 percent from 10 percent, privatizing state assets and overhauling its banks to ensure that they are not havens for money laundering.

Russia also was expected to contribute to the arrangement, perhaps by agreeing to lower the interest rate on a loan worth 2.5 billion euros it has already made to Cyprus.

Mujtaba Rahman, a senior analyst with the Eurasia Group, a political risk research and consulting firm, said it was likely that countries like Germany and Finland would ultimately reach a deal with the I.M.F.

“The fact is that some governments in the north of Europe need the I.M.F. also to be contributing money to Cyprus in order to convince their parliaments to give approval to a deal,” Mr. Rahman said.

This article has been revised to reflect the following correction:

Correction: March 15, 2013

Because of an editing error, a headline on an earlier version of this article misspelled the name of the country in talks to receive a bailout. It is Cyprus, not Cypress.

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