Last updated: March 3, 2013 5:31 pm

Cyprus banks hit by ‘substantial outflows’

Cypriot banks have suffered “substantial outflows” from depositors spooked by speculation over forced losses, the island’s finance minister has warned, as he pledged to fight-off radical rescue options that would deal a “fatal blow” to confidence.

Speaking ahead of Monday’s gathering of eurozone finance ministers, Michalis Sarris told journalists he was determined to agree a long-term bailout for Cyprus this month, broadly in-line with the demands of international lenders.

But he drew the line at forcing losses on uninsured bank depositors and is resisting the detailed terms of other potential bailout conditions, including the execution of a sweeping privatisation programme and an outside audit on money laundering.

Mr Sarris warned that options such as creditor haircuts – which he stressed had not been formally discussed – would “strike a fundamental blow” to Cyprus’ services economy, hobble its ability to repay debts and set a damaging eurozone precedent.

“It will be a pity if we deal a fatal blow to this rebirth in confidence in the economy by making unreasonable demands,” he said.

The new Cypriot government is under intense pressure to agree a bailout deal in a matter of weeks. While Cyprus says funding is available through May, following months of debate and delay there is a concerted eurozone push for a deal to be signed by the end of March.

Agreeing terms will prove difficult. EU estimates, seen by the FT, show that Cypriot needs, about €16.7bn, would increase the country’s debt to 145 per cent of national income by 2014 – levels that the International Monetary Fund and a German-led group of countries believe is unsustainable.

As a result, Cyprus is being pressured to accept a series of debt-reducing measures, including a privatisation programme that would raise an estimated €1.5bn and a restructuring of its banking sector.

An extreme option, favoured by some bailout lenders, is to force losses on large deposit holders and senior bondholders. While such an aggressive plan could cut Cyprus’ bailout by an estimated €11bn, European Commission officials fear it would panic creditors to other eurozone banks, particularly in Spain.

Asked whether the speculation were undermining confidence in Cypriot banks, Mr Sarris said: “Yes we have had substantial outflows of deposits ... all these discussions [in the press] have been very damaging to the Cypriot banking system.” He did not cite any figures.

On privatisation, Mr Sarris is not pushing for the three-year postponement, an idea raised by Nicos Anastasiades, Cyprus’ new centre-right president. But he wants more flexible terms to avoid a fire sale that increases unemployment.

“We are not putting a fixed number of years. Instead I am saying when the conditions are right ... it could be met very quickly, it could take more time,” he said.

Cyprus is also resisting a German-backed plan to send outside auditors to Cypriot banks to examine whether they are living up to international anti-money laundering standards.

Again Mr Sarris is hoping to negotiate a compromise where “mutually agreed experts” are involved in an implementation assessment led by Moneyval, the Council of Europe’s anti-money laundering agency. Cyprus argues that arranging it under the Moneyval umbrella will protect the anonymity of depositors and provide some assurances over the use of confidential information.

“It responds to those who want to take a more careful look but at the same time not doing it in a way that could cause chaos,” he said.

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