Angry Cypriots try in vain to withdraw savings as eurozone bailout terms break taboo of hitting bank depositors
European finance ministers have agreed an £8.7bn bailout for Cyprus which includes all Cypriot bank customers handing over 10% of their savings.
Cyprus becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the eurozone for financial help amid the region's debt crisis, but also faces a possible run on its banks as depositors try to avoid losing the 10%.
The savers, half of whom are thought to be Russian, will raise almost €6bn. It is the first time a bailout has included such a measure.
"I wish I was not the minister to do this," the Cypriot finance minister, Michael Sarris, said after 10 hours of late-night talks in which eurozone finance ministers agreed the package. "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, a renewed confidence fostered by the European Central Bank's promise last year to do whatever it takes to support the euro.
However, on Cyprus, initial incredulity at the decision gave way to anger. Co-op credit societies, normally open on Saturdays, were shut for business in the coastal city of Larnaca as depositors started queuing early in the morning to withdraw their cash.
"I'm extremely angry. 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," said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.
"They call Sicily the island of the mafia. It's not Sicily, it's Cyprus. This is theft, pure and simple," said a pensioner.
The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks hit by sovereign debt restructuring in Greece.
The levy on bank deposits will come into force on Tuesday, after a bank holiday on Monday. Cyprus will take immediate steps to prevent electronic money transfers over the weekend.
"As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders," the Dutch finance minister, Jeroen Dijsselbloem, who chaired the meeting in Brussels, told reporters.
Such levies break the taboo of hitting bank depositors with losses, but Dijsselbloem said it would not have otherwise been possible to salvage its financial sector, which is around eight times the size of the economy.
"We are not penalising Cyprus ... we are dealing with the problems in Cyprus," Dijsselbloem said, adding that that under the programme, 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 by 2.5 percentage points to 12.5%.
This should boost Cypriot revenues, limiting the size of the loan needed from the eurozone and keep down public debt.
The International Monetary Fund managing director, Christine Lagarde, who attended the meeting, said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.
"We believe the proposal is sustainable for the Cyprus economy," she said, "The IMF is considering proposing a contribution to the financing of the package ... The exact amount is not yet specified."
Cyprus, with a GDP of barely 0.2% of the EU bloc's overall output, applied for financial aid last June, but negotiations were stalled by the complexity of the deal and the reluctance of the island's previous president to sign.
Moscow, which has close ties with Nicosia, is likely to help by extending a €2.5bn loan to Cyprus by five years to 2021 and reducing the interest rate.
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