Cyprus depositors’ fate sealed in Berlin

Unbeknown to the Cypriot delegation members as they entered the hulking Justus Lipsius summit building in Brussels on Friday night, their fate was already sealed: their German counterparts wanted about €7bn for the estimated €17bn bailout of their country to come from deposits in the country’s banks.

“They were hand in hand with Finns, who were much more dogmatic,” said one senior eurozone official involved in the 10-hour marathon talks that stretched until 3am on Saturday morning. “Had that not happened, full bail-in,” the official added, using the terminology for wiping out nearly all Cypriot bank accounts.

Cyprus’s new president Nicos Anastasiades did not like the idea of forcing any losses on ordinary account holders. Indeed, his recently sworn-in finance minister, Michael Sarris, only weeks earlier had called it a “stupid idea”.

But after receiving what Cypriot officials said were reassurances from Angela Merkel, the German chancellor, earlier in the day on the sidelines of an EU summit in the same building, Mr Anastasiades agreed to a deal that he thought would include relatively modest “haircuts” – a 7 per cent levy on deposits above €100,000 and a 3.5 per cent hit on those below.

With the principle of haircuts agreed, Mr Anastasiades decided to stay for the finance ministers meeting, which was just getting under way. All he asked was that the rates be tweaked: raise the levy on the bigger deposits in order to lower the hit taken by the less well off. Both sides believed a deal was at hand and by early in the evening, word began to filter out that an agreement might be announced much earlier than expected.

However, Mr Anastasiades was left reeling by the response to his request for modest adjustments, according to Cypriot officials. Wolfgang Schäuble, the German finance minister, said Nicosia would immediately have to raise as much as €7bn from depositor haircuts. A stunned Mr Anastasiades decided to walk out. “The president said, ‘I can’t do that’,” said one member of the Cypriot delegation. “You’re trying to destroy us. Even if I agree to it, I can’t pass it [through parliament].”

But Mr Anastasiades soon learnt storming out was not an option. The European Central Bank had another shock for him: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance – the cheap central bank loans that teetering eurozone banks need to run their day-to-day operations.

The message, delivered by the ECB’s chief negotiator, Jörg Asmussen, meant that if no deal was reached, Laiki would collapse, probably bringing the island’s largest bank down with it, and saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.

In depth

Cyprus bailout

International lenders have agreed a €10bn rescue of the debt-laden island contingent on the raising of €5.8bn from a Cypriot bank deposit levy

Mr Schäuble was not alone. Several officials involved in the talks said he not only had backing from the Finns, Slovaks and to a lesser extent the Dutch. The International Monetary Fund, which had been urging depositor haircuts for months, had won the argument over the skittish European Commission, which had long worried that seizing depositor assets could spark a bank run in Cyprus and, potentially, elsewhere in the eurozone.

José Manuel Barroso, the commission president, and Marco Buti, the top civil servant in the commission’s economics directorate, had even contemplated a programme that excluded the IMF, one senior official involved in the talks said. But by then, multiple officials said, the commission had lost credibility in Berlin.

“The Germans said, ‘Better a programme with the IMF than with the European Commission’,” said the senior official involved in the talks. “In my counting, five to six member states would not have supported a programme without the IMF.”

Another official in the room said that after repeatedly getting estimates wrong in Greece, the economists in Brussels had a hard time getting their voices heard. “I think the commission did not appreciate that after Greece, it is too difficult to fudge [debt projections],” the official said.

Backed into a corner, the only thing the Cypriots could do was mitigate the damage. Several officials suggested putting all of the burden on deposits over €100,000. Berlin was agnostic about where the axe fell. But Cypriot officials, with the backing of the commission, felt anything over 10 per cent would appear so onerous that it would make the situation even worse.

“The Cypriot president did not want to agree to a levy higher than 10 per cent,” said one top negotiator. “People were joking that he has only rich friends.”

Once that limit was placed on the top rate, it became simple maths. Negotiators agreed to count €1.4bn in privatisation receipts and new income from an increased corporate tax – which would go from 10 to 12.5 per cent – towards the Cypriot contribution, bringing the total needed from the deposits to €5.8bn. With a top rate of 9.9 per cent, the lower rate fell in at 6.75 per cent. The EU and IMF would lend Nicosia €10bn.

Cypriot officials remain angry and stunned. But now the Cypriot parliament must make the same stark choice Mr Anastasiades faced on Friday night.