Stabilising the situation in Cyprus Photo: Reuters

"I am delighted that we managed to hammer out a deal for Cyprus overnight and thus prevent the country becoming insolvent," said Angela Merkel. The deal spreads the financial burden fairly, she added. Banks must accept responsibility for their own affairs. "That is what we have always said."

Conditions and solidarity

Cyprus can count on the solidarity of the European states, she continued. They will continue to help Cyprus on its difficult path with guarantees over the years to come. "But Cyprus must of course do its bit too, in the form of privatisation, structural reform and raising tax rates which have been very, very low to date," Angela Merkel declared.

That is European cohesion – on the one side conditions to prevent this situation repeating itself in future, and on the other solidarity.

Doing the right thing

"We have achieved what we always felt was right," declared Federal Finance Minister Wolfgang Schäuble in Berlin. "We have not just discussed a programme. We have produced a result that will now be taken as the basis for negotiations with the troika," he underscored.

This outcome is capable of stabilising the situation in Cyprus. It is fair to all stakeholders and can help restore lost confidence. "

 

Improved regulation

Cyprus is to get its debt down to a sustainable level of 100 per cent of the country’s gross domestic product (GDP) by 2020. For this, the volume of the EU bailout had to be limited to 10 billion euros. The remaining shortfall must be found by the Cypriot government, meaning that investors and the banks’ creditors must do their bit.

This regulation is far better and far clearer than last week’s compromise, said Wolfgang Schäuble. "It is, nevertheless, going to painful for Cyprus."

The bank balances of small savers will, however, be protected. "There is absolutely no risk to deposits of less than 100,000 euros. They will be fully guaranteed,” stressed Angela Merkel.

The role of the largest banks 

"One of Cyprus’ two major banks will be closed and wound down," explained Wolfgang Schäuble. Deposits of up to 100,000 euros with the Laiki Bank will be untouched, all others will be transferred to a “bad” bank. The Federal Finance Minister stressed that the outcome of winding down is still uncertain.

All deposits with the Bank of Cyprus worth more than 100,000 euros will be frozen, he continued, with deposits becoming liable or risk capital. The Bank of Cyprus is to achieve an equity ratio of nine per cent. It will be up to the troika to hammer out the details of what percentage of deposits will be involved. It could be "a good 50 per cent," he stated. 

The banking sector in Cyprus will be downsized to achieve a normal ratio to the country’s GDP, said Wolfgang Schäuble. The bailout funds will not be used to recapitalise the Laiki Bank and the Bank of Cyprus. 

"In cooperation with Cyprus, everything will be done to ensure that the banks in Cyprus can reopen as soon as possible." This will be clarified in the course of the day.

Comprehensive package

As agreed over the last few weeks, independent experts will be reviewing anti-money-laundering activities in Cyprus. 

The government will raise the low rates of corporate tax and tax on interest income. With a view to fiscal consolidation, vital structural reforms and privatisation too Cyprus will be introducing an ambitious adjustment programme.

German Bundestag involved

"I have already informed the heads of the parliamentary groups in the German Bundestag and discussed with them the involvement of the Bundestag," said Wolfgang Schäuble. The pertinent bodies of the parliamentary groups will decide whether or not the German Bundestag will be dealing with Cyprus bailout this week. The Federal Finance Minister expects a vote on the bailout in the third week of April. By then the details of the programme ought to be available.

The Eurogroup has asked the troika, composed of the European Central Bank, the International Monetary Fund and the European Commission, to work out the details of the programme by early April with Cyprus in the form of a memorandum of understanding. This will then have to be approved by the German Bundestag..

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." The Federal Finance Minister pointed this out over the last few weeks. Half of the investments are held by non-Cypriot citizens. 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.