Monday

10th Aug 2020

Cyprus rejects bailout deal

  • Anastasiades will reopen bailout talks on the €10bn rescue package (Photo: consilium.europa.eu)

The eurozone plunged into uncertainty on Tuesday (19 March) after the Cypriot parliament voted to reject the €10 billion EU bailout plan by an overwhelming majority.

Thirty-six deputies in the 56 member House of Representatives opposed the agreement struck by finance ministers in Brussels on Saturday, with 19 members of the Democratic Rally party of President Anastasiades abstaining and one MP absent from the vote.

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The result, which marks the first time a national parliament has vetoed a eurozone bailout plan, will see the recently elected Anastasiades bid to re-open negotiations on a rescue package.

At the heart of the controversy is a planned €5.8 billion to be raised using deposits held in Cypriot banks. The original deal features a compulsory levy of 6.75 percent on deposits under €100,000 alongside a 9.9 percent tariff on savings over €100,000.

Cyprus' banks on Tuesday remained closed for a second successive day in a bid to prevent a bank run.

On a day of high drama, the Cypriot government proposed to limit the pain by exempting savers holding €20,000 or less, but it was not enough to change the vote.

Earlier, Jeroen Dijsselbloem, chair of the Eurogroup, told the Dutch parliament that the one-off levy applied only to Cyprus and would not be repeated elsewhere.

"It won't happen at all because in other countries banking sectors are not as unbalanced, they are not as loaded with as many risks and the authorities are not in a position where they can't save their own financial sector," he told deputies.

However, in a stark warning to the Mediterranean island, he added that the Cypriot contribution to the rescue package was non-negotiable. "They have to be brought back from the brink of the abyss, but that will entail a contribution of €6 billion," he told Dutch TV channel RTL 7.

For his part, Panicos Demetriades, Cyprus' central bank governor said the levy should not touch accounts under €100,000, the minimum amount that must be protected for savers under EU law on deposit guarantees.

“The credibility of, and trust in the banking sector depends on this,” he said.

Meanwhile, in a statement released following the Cypriot vote, the European Central Bank (ECB) indicated that it would not cut off emergency support to the country's banks

"The ECB takes note of the decision of the Cypriot parliament and is in contact with its troika partners," the bank said, referring to the European Commission and the International Monetary Fund.

It added that "the ECB reaffirms its commitment to provide liquidity as needed within the existing rules."

Analysis

Cyprus 'business model' was no mystery to EU

EU politicians are saying Cyprus must scrap its "unsustainable business model." But data shows the writing was on the wall ever since the island joined the euro, five years ago.

EU forecasts deeper recession, amid recovery funds row

The economies of France, Italy and Spain will contract more then 10-percent this year, according to the latest forecast by the EU executive, as it urges member state governments to strike a deal on the budget and recovery package.

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