New eurozone bailout sparks panic cash withdrawals

Sunday 17 March 2013

Nervous depositors in Cyprus rushed to ATMs yesterday to try to drain their accounts after the eurozone struck a deal to hand the country a bailout worth €10 billion (£8.7bn), but demanded depositors in its banks forfeit some money to stave off bankruptcy, despite the risk of a wider run on savings.

People queue to use an ATM in Larnaca yesterday, after news broke that savers were to be hit in return for a bailout of the country Photograph: Petros Karadjias/AP

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A rescue package for the Mediterranean island has been agreed at the EU Council. So why are Cypriots up in arms? By Annika Breidthardt in Brussels

The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the eurozone for financial help during the region's debt crisis.

In a radical departure from previous aid packages – prompting anger – eurozone finance ministers forced Cypriot savers to pay up to 10% of their deposits to raise almost €6bn.

Almost half of its depositors are believed to be non-resident Russians, but most of those queuing yesterday at cash machines appeared to be Cypriots. Britons with bank accounts in Cyprus also face a hit on their finances. There are 59,000 British residents in Cyprus and 1.1 million Britons visit the island every year."I wish I was not the minister to do this," Cypriot finance minister Michael Sarris said after 10 hours of late-night talks in Brussels where the package was hammered out.But he added: "Much more money could have been lost in a bankruptcy of the banking system or indeed of the country."Without a rescue, Cyprus would default and threaten to unravel investor confidence in the eurozone 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 deposit levy – set at 9.9% on bank deposits exceeding €100,000 and at 6.7% on anything below that – will take force on Tuesday after a bank holiday on Monday. To guard against capital flight, Cyprus will take immediate steps to prevent electronic money transfers over the weekend.In the coastal town of Larnaca, where irate depositors queued to withdraw money from cash machines, co-op credit societies normally open on Saturdays stayed closed."I'm extremely angry," said British-Cypriot Andy Georgiou, 54. "I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans.""They call Sicily the island of the Mafia," said a pensioner. "It's not Sicily, it's Cyprus. This is theft, pure and simple."The levy breaks the taboo of hitting bank depositors with losses. But Dutch finance minister Jeroen Dijsselbloem said it would otherwise have been impossible to save the Cypriot financial sector, which, compared with national economic output, is more than twice as big as the EU average."As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution from all deposit holders," Dijsselbloem, who chaired the Brussels meeting, said.The island's bailout had repeatedly been delayed amid concerns from other EU states that its close business relations with Russia, and a banking system flush with Russian cash, made it a conduit for money-laundering.Dijsselbloem said that under the rescue, 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 to try to boost revenues. Last night, Cypriot President Nicos Anastasiades called a meeting of party leaders to brief them on the details of the bailout.■CYPRUS

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New eurozone bailout sparks panic cash withdrawals

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