The euro zone has agreed on the main lines of assistance for Cyprus Photo: picture alliance / dpa

"How Cyprus spreads the financial burden is entirely it’s decision and has nothing to do with the euro zone," explained Federal Finance Minister Wolfgang Schäuble in an interview given to Deutschlandfunk. "European tax-payers cannot be expected to pick up the full tab."

Agreement on main points

The Eurogroup has agreed on the main points of an agreement to stabilise Cyprus’ financial sector, consolidate the country’s budget and realise structural reforms. The precondition was to find a way of returning the country’s debt to sustainable levels. Cyprus is to be enabled to manage its own debt once again.

The Eurogroup concluded, on the basis of the main lines of the programme, that Cyprus can be granted assistance under the European Stability Mechanism.

The main points of the reform and adjustment programme for Cyprus are as follows:

• The country’s domestic banking sector is to be reduced in size to the EU average
• The costs of recapitalising and restructuring the banks are to be shared fairly between the state and the banking sector
• The Republic of Cyprus is to put its budgetary house in order
• Effective steps are to be taken to tackle money laundering, and
• Russia is to be involved.

German Bundestag to be involved

Cyprus’ parliament must pass the legislation necessary to impose a stability charge on bank deposits.

The Eurogroup will also submit the main points of the agreement to the German Bundestag and the other national parliaments. It is up to the German Bundestag when it decides on this matter.

Then, the Troika, composed of the European Central Bank, the International Monetary Fund and the European Commission, can work out the details of a programme in a memorandum of understanding. This too must be approved by the German Bundestag.

Debt sustainability is the precondition

In order to ensure that by 2020 Cyprus can achieve a sustainable level of debt, equivalent to 100 per cent of the country’s gross domestic product (GDP), the volume of aid had to be limited. "A programme that does not limit the total aid for Cyprus to a maximum of 10 billion euros is absolutely inconceivable," said Wolfgang Schäuble. The IMF has been saying this for months, he added.

Given the fact that the country is facing a shortfall of some 17 billion euros in total, "7 billion euros or so will have to come from the bank owners and investors," explained Wolfgang Schäuble.

For this reason it was decided the spread the financial burden and to involve the bank’s creditors and investors – rather than leaving the government to make good the full sum.

The cause of the crisis – Cyprus’ business model

"Cyprus’ problem is that this small country has about 70 billion euros invested in its banks. Obviously most of these investors have chosen to invest their money in Cyprus because of lower taxes and possibly also because of other prevailing conditions," continued the Federal Finance Minister.

Half of the investments are held by non-Cypriot citizens. "And we are not talking about 100,000 euros, but about very much higher sums." Cyprus’ business model has brought the country to the brink of insolvency, Wolfgang Schäuble continued.

Investors who chose to put their money in countries where they pay less tax and might well be subject to fewer controls must realise that they bear the risk when the banks in this country become insolvent, stressed the Federal Finance Minister. 

The Eurogroup is an informal body within the European Union, which discusses and coordinates matters related to the euro and the European currency union. It consists of the ministers of the euro-zone member states responsible for finance (generally minister of finance, but sometimes also ministers of economics). Germany is represented in the Eurogroup by Federal Finance Minister Wolfgang Schäuble.