Cyprus Rescue Package Could Mean Losses for Depositors

A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of euro zone finance ministers.

The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.

The new plan has not been endorsed by its authors in the European Commission or by individual euro zone members. The memo warns that “the risks associated with this option are significant”, including a renewed danger of contagion in euro zone financial markets, and premature collapse in the Cypriot banking sector.

The radical proposal is intended to produce a more sustainable debt solution for the country, cutting the size of Cyprus’s bailout by two-thirds – from 16.7 billion euros to only 5.5 billion euros – by involving more foreign depositors and bond holders.

It would reduce Cyprus’s outstanding debt to just 77 percent of economic output, compared with 140 percent in the current full bailout plan.

By “bailing in” uninsured bank depositors, it would also involve more foreign investors, especially from Russia, some of whom have used Cyprus as a tax haven in recent years. That would answer criticism from Berlin in particular, where politicians are calling for more drastic action to stop the island being used for money laundering and tax evasion.

via CNBC

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