The German Bundestag voted, with a clear majority, to approve the assistance for Cyprus within the framework of the European Stability Mechanism (ESM). Germany would have been unable to play its part in the financial support for the island state without the approval of the nation’s parliament.

The troika, consisting of representatives of the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission, had hammered out the details of the aid programme for Cyprus, including the Memorandum of Understanding. The finance ministers of the 17 euro-zone states then adopted the 10 billion euro bailout package. Cyprus is to be granted a nine billion euro loan within the framework of the European Stability Mechanism (ESM), provided the IMF shoulders a sum of one billion euros as announced.

Avoiding contagion

"If we fail to help Cyprus, the state will inevitably face bankruptcy," said Wolfgang Schäuble. The troika determined that the knock-on effect would be disastrous. "The ills besetting Cyprus could spread to other parts of the euro zone." Cyprus’ problems must not be allowed to become the problems of other countries.

The government statement delivered by Wolfgang Schäuble in the German Bundestag

Conditions and solidarity

For Cyprus too it is true to say that, "Help is always help towards self-help," Wolfgang Schäuble continued. Solidity and solidarity must go hand in hand. The situation of Cyprus is very specific. Its problems can only be resolved if its banking sector is significantly scaled down. "This aid programme will ensure just that," underlined the Federal Finance Minister.

Ten billion euro ceiling on package

By 2020 Cyprus’ debt is to be brought down to a sustainable level of 105 per cent of the country’s gross domestic product (GDP), stated the troika. For this reason, the aid package cannot exceed 10 billion euros. If this sum is to be enough, the bank owners, creditors and investors in Cypriot banks will have to do their bit. This is the only way to ensure a viable programme.

"When banks get into trouble, there must be a hierarchy of liability," said Wolfgang Schäuble. Firstly, it is up to the bank owners to step in, then come the creditors, followed by investors, while ensuring that guaranteed savings are not touched. Only then can the state be involved, and after the individual state the international community. This hierarchy must also be respected by any European banking union.

"Risks and liability go hand in hand," underscored the Federal Finance Minister. People choosing to invest their cash in Cyprus knew they were accepting higher risks for higher interest. "Deposits of up to 100,000 euros are guaranteed in line with European law."

The role of the major banks 

Deposits of up to 100,000 euros with the Laiki Bank will be untouched, all others will be transferred to a “bad” bank. Deposits with the Bank of Cyprus worth more than 100,000 euros will be used to allow the bank to achieve an equity ratio of nine per cent.

The country’s banking sector has proved to be badly structured, and far too large for the state to handle, added Wolfgang Schäuble. The bailout funds will not be used to recapitalise the Laiki Bank and the Bank of Cyprus.

Comprehensive package

In return for the assistance provided by European partners, Cyprus’s government will raise corporate tax rates and the tax on interest income. In terms of fiscal consolidation, vital structural reforms and privatisation too, Cyprus will be undertaking an ambitious adjustment programme. Clear agreements have also been reached on anti-money-laundering activities.

Now that the German Bundestag has approved the package the first instalment could be paid by the ESM in May, provided Cyprus takes the most urgent steps laid out in the Memorandum of Understanding.

"We do not want tax-payers to be required to bail out banks," declared Chancellor Angela Merkel on 25 March. This deal shares the burden fairly, she added. Banks must accept responsibility for their own affairs. "That is what we have always said."

Four aspects of stabilisation

Wolfgang Schäuble listed four factors essential for stabilising the euro:

• Relevant states must undertake essential reforms and all aid must be made strictly conditional on this
• The currency union must be restructured to make it a stability union
• The European Stability Mechanism (ESM)
• The banking sector in euro-zone states must be stabilised with higher equity capital and a European banking watchdog.

"Progress can be seen in the countries hit by the crisis," said Wolfgang Schäuble. Little by little we are regaining lost confidence. "We have made good progress in overcoming the sovereign debt crisis in the euro zone over the last year in particular."