Reuters: US Dollar Report: UPDATE 5-Euro zone agrees 10 bln euros bailout for Cyprus

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UPDATE 5-Euro zone agrees 10 bln euros bailout for Cyprus Mar 16th 2013, 02:41 Fri Mar 15, 2013 11:35pm EDT * Cypriot bailout of 10 billion euros agreed * Staggered one-off levy on bank deposits to be imposed * Corporate tax rate to rise, new tax on interest on deposits * IMF to contribute, amout not clear * Ireland, Portugal to get more time to repay bailout loans By Annika Breidthardt and Jan Strupczewski BRUSSELS, March 16 (Reuters) - Euro zone ministers struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion) to stave off bankruptcy, in return for promises of tax rises from Nicosia. Cyprus is the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help in the wake of the sovereign debt crisis that started in 2010. After 10 hours of talks through the night, finance ministers from the currency bloc agreed to a package, smaller than initially expected, mainly needed to recapitalise the Mediterranean island's banks which were hit hard by a sovereign debt restructuring in Greece last year. "The Eurogroup was able to reach a political agreement with the Cypriot authorities on the cornerstones of this agreement," Dutch Finance Minister Jeroen Dijsselbloem, who chairs the finance ministers' group, told reporters. "Financial assistance to Cyprus is warranted to safeguard financial stability to the island and to the euro zone as a whole." Under the emergency lending programme, Cyprus agreed to increase its nominal corporate tax rate by 2.5 percentage points to 12.5 percent, a senior euro zone official told Reuters. Nicosia will also impose a 9.9 percent one-off levy on deposits above 100,000 euros in Cypriot banks and a tax of 6.75 percent on smaller deposits. There will also be a tax on interest that the deposits generate, the official said. Separately, euro zone ministers agreed to extend the maturity of emergency loans to Ireland and Portugal to smooth out their return to market financing this year and next. The tax measures will boost Cypriot revenues, limiting the size of the loan needed from the euro zone, in order to keep public debt at a level that will be possible to service. Dijsselbloem said that under the programme, the island's debt would fall to 100 percent of GDP by 2020. He said the euro zone would welcome a contribution to the bailout from the International Monetary Fund. IMF chief Christine Lagarde, who attended the Brussels meeting, said the Fund was considering its position. It has played a key part in previous euro zone bailouts. "We believe the proposal is sustainable for the Cyprus economy, it is fully financed," she said. "The IMF is considering proposing a contribution to the financing of the this package ... The exact amount is not yet specified." LONG TIME COMING Cyprus, with gross domestic product of barely 0.2 percent of the bloc's overall output, applied for financial aid last June, but negotiations were stalled by presidential elections in February. Without emergency lending, Cyprus will default and threaten to dent the return of investor confidence in euro zone public finances fostered by the European Central Bank's promise to do whatever it takes to shore up the currency bloc. Russia is likely to help finance the programme by extending a 2.5 billion euro loan already made to Cyprus by five years to 2021 and reducing the interest rate, which is now at 4.5 percent, EU Economic and Monetary Affairs Commissioner Olli Rehn said. Cypriot Finance Minister Michael Sarris will travel to Moscow for meetings on Monday, Cypriot diplomats said, raising the possibility that an agreement on participation can be struck with the Russians. As such, Saturday's was a "political agreement" leaving final details to be tied up. Cyprus originally estimated that it needed about 17 billion euros - almost the size of its entire annual output - to restore its economy to health. Up to 10 billion euros of that were earmarked to recapitalise its banks and 7 billion required for servicing debt and running general government operations. But because a loan of that magnitude would increase its debt to unsustainably high levels and call into question its ability ever to pay it back, policymakers sought to reduce it by finding more revenue sources in Cyprus itself. The IMF had pushed the idea that depositors in Cypriot banks should bear some of the costs of bailing out the island, a process dubbed "bail-in". But that approach was rejected by Cyprus, the European Commission and some members of the ECB. Nonetheless, depositors will take a hit. "The size of the banking sector is so large we had to form a very specific programme and we found it justified to involve the depositors," Dijsselbloem said. Link this Share this Digg this Email Reprints

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