Q&A: Cyprus deal
BBC
Cyprus has agreed a deal with
the European Union and the International Monetary Fund (IMF) to secure a 10bn
euro bailout. It came just hours before a deadline set by the European Central
Bank (ECB), and after a week of uncertainty about the future of Cyprus in the
eurozone.
What has been agreed?
Cyprus has agreed to a
significant restructuring of its banking sector, along with other measures such
as tax rises and privatisations.
The measures are designed to
raise billions towards the bailout, but protect bank customers with deposits of
less than 100,000 euros.
Cyprus's second largest bank -
the troubled Laiki Bank - will be closed down and deposits above 100,000 euros
moved into a "bad bank".
It is likely that customers
will lose a significant amount of these deposits, though it is not clear how
much.
Deposits of less than 100,000
euros will be moved into Bank of Cyprus, the country's biggest bank, which is
being significantly restructured.
Deposits at Bank of Cyprus of
more than 100,000 euros are being frozen and are also at risk of being raided
as part of the restructuring.
The deal means that depositors
with more than 100,000 euros in these banks are likely to see significant losses
once the restructuring is complete.
What about the bank levy?
In the original EU-IMF deal
agreed a week ago, all customers of Cypriot banks were to face a one-off tax on
their deposits, starting at 6.75% for the smallest deposits.
That was designed to raise
5.8bn euros towards the cost of the bailout. But it proved hugely unpopular
with the Cypriot public and was voted down by Cyprus's parliament.
There is no bank levy in the
new deal, but the bank restructuring measures mean deposits over 100,000 euros
will effectively be used to pay the bulk of the 5.8bn-euro bill.
The measures cannot be voted
down by Cyprus's parliament, as new bank restructuring laws were agreed and
voted through by parliament last week.
Was Cyprus not doing quite
well before the global financial crisis?
Yes. The IMF described the
country's economic performance before 2008 as a "long period of high
growth, low unemployment, and sound public finances".
There was a recession in 2009
but it was the mildest in the eurozone. However, two interlinking factors have
brought Cyprus close to default - the deteriorating government finances and the
country's struggling banks.
So what went wrong?
During the good years Cyprus
built up what the IMF calls "vulnerabilities". There was rapid growth
in credit, the banks made many loans to Greece and there was a property market
boom.
The banks are central to this
story. They grew rapidly. By 2011, the IMF reported that their assets - which
include all the loans they have made - were equivalent to 835% of annual
national income, or GDP. A chunk of that is down to foreign-owned banks, but
those that are Cypriot had made loans to Greek borrowers worth 160% of Cypriot
GDP.
There have been losses on the
loans to private borrowers because of the depression that has hit the Greek
economy. And the value of the debts owed by the Greek government was cut in a
debt relief exercise undertaken last year. It might have helped Greece, but the
Cypriot banks were hit.
What does that mean for the
government finances?
Many countries have rescued
their banks in the financial crisis - recapitalising them, in the jargon. It
means governments put in money and get shares in return. It is controversial,
but governments have taken the view that it is better for the economy than
allowing important banks to fail. However, Cyprus cannot afford the
recapitalisation to the extent that the banks need.
The government finances have
been further weakened by the slow economic growth and, more recently, decline
in the eurozone which have hit Cyprus too. Growing doubts in the financial
markets about the government's financial position have made it almost
impossible for Cyprus to borrow.
Why was the bank levy
considered?
When countries get an
international bailout, they are often expected to raise funds themselves, by
raising taxes or selling state-owned assets.
The levy on bank deposits was
designed to play the same role. It was intended to reduce the size of the
bailout and therefore the amount of new debt Cyprus had to take on. But there
is almost certainly a political aspect, too. In the eurozone, there are
concerns about money-laundering in Cyprus and the presence of large amounts of
Russian-owned money in the banks. Germany is reputed to be especially unhappy
about the idea of using European taxpayers' money to rescue them.
Experts say the decision to
target ordinary savers came about because Cypriot banks have fewer private
bondholders than banks in other eurozone countries. In the Greek bailout, it
was private bondholders who had to take a "haircut" - a slice out of
their investment.
After the deal provoked
outrage in Cyprus, the parliament promptly voted against it, and it is
increasingly seen as a blunder by European and Cypriot authorities.