Cyprus Bailout Tax Could Be Worse Than Expected

[HuffingtonPost]

* Terms tough on big depositors at largest bank                

* Cypriot leader says risk of bankruptcy contained                

* Accuses Europe of trying to experiment with Cyprus                

* Says capital controls to be gradually lifted, no time  frame                

By Michele Kambas                

NICOSIA, March 29 (Reuters) - Big depositors in Cyprus's  largest bank stand to lose far more than initially feared under  a European Union rescue package to save the island from  bankruptcy, a source with direct knowledge of the terms said on  Friday.                

Under conditions expected to be announced on Saturday,  depositors in Bank of Cyprus will get shares in the  bank worth 37.5 percent of their deposits over 100,000 euros,  the source told Reuters, while the rest of their deposits may  never be paid back.                

The toughening of the terms will send a clear signal that  the bailout means the end of Cyprus as a hub for offshore  finance and could accelerate economic decline on the island and  bring steeper job losses.                

Officials had previously spoken of a loss to big depositors  of 30 to 40 percent.                

Cypriot President Nicos Anastasiades on Friday defended the  10-billion euro ($13 billion) bailout deal agreed with the EU  five days ago, saying it had contained the risk of national  bankruptcy.                

"We have no intention of leaving the euro," the conservative  leader told a conference of civil servants in the capital,  Nicosia.                

"In no way will we experiment with the future of our  country," he said.                

Cypriots, however, are angry at the price attached to the  rescue - the winding down of the island's second-largest bank,  Cyprus Popular Bank, also known as Laiki, and an  unprecedented raid on deposits over 100,000 euros.                

Under the terms of the deal, the assets of Laiki bank will  be transferred to Bank of Cyprus.                

At Bank of Cyprus, about 22.5 percent of deposits over  100,000 euros will attract no interest, the source said. The  remaining 40 percent will continue to attract interest, but will  not be repaid unless the bank does well.                

Those with deposits under 100,000 euros will continue to be  protected under the state's deposit guarantee.                

Cyprus's difficulties have sent jitters around the fragile  single European currency zone, and led to the imposition of  capital controls in Cyprus to prevent a run on banks by worried  Cypriots and wealthy foreign depositors.                                

"CYPRUS EURO"                

Banks reopened on Thursday after an almost two-week shutdown  as Cyprus negotiated the rescue package. In the end, the  reopening was largely quiet, with Cypriots queuing calmly for  the 300 euros they were permitted to withdraw daily.                

The imposition of capital controls has led economists to  warn that a second-class "Cyprus euro" could emerge, with funds  trapped on the island less valuable than euros that can be  freely spent abroad.                

Anastasiades said the restrictions on transactions -  unprecedented in the currency bloc since euro coins and  banknotes entered circulation in 2002 - would be gradually  lifted. He gave no time frame but the central bank said the  measures would be reviewed daily.                

He hit out at banking authorities in Cyprus and Europe for  pouring money into the crippled Laiki.                

"How serious were those authorities that permitted the  financing of a bankrupt bank to the highest possible amount?"  Anastasiades said.                

The president, barely a month in the job and wrestling with  Cyprus's worst crisis since a 1974 war split the island in two,  accused the 17-nation euro currency bloc of making  "unprecedented demands that forced Cyprus to become an  experiment".                

European leaders have insisted the raid on big bank deposits  in Cyprus is a one-off in their handling of a debt crisis that  refuses to be contained.                                

MODEL                

But policymakers are divided, and the waters were muddied a  day after the deal was inked when the Dutch chair of the euro  zone's finance ministers, Jeroen Dijsselbloem, said it could  serve as a model for future crises..                

Faced with a market backlash, Dijsselbloem rowed back. But  on Friday, European Central Bank Governing Council member Klaas  Knot, a fellow Dutchman, said there was "little wrong" with his  assessment.                

"The content of his remarks comes down to an approach which  has been on the table for a longer time in Europe," Knot was  quoted as saying by Dutch daily Het Financieele Dagblad. "This  approach will be part of the European liquidation policy."                

The Cyprus rescue differs from those in other euro zone  countries because bank depositors have had to take losses,  although an initial plan to hit small deposits as well as big  ones was abandoned and accounts under 100,000 euros were spared.                

Warnings of a stampede at Cypriot banks when they reopened  on Thursday proved unfounded.                

For almost two weeks, Cypriots were on a ration of limited  withdrawals from bank cash machines. Even with banks now open,  they face a regime of strict restrictions designed to halt a  flight of capital from the island.                

Some economists say those restrictions will be difficult to  lift. Anastasiades said the capital controls would be "gradually  eased until we can return to normal".                

The government initially said the controls would stay in  place for seven days, but Foreign Minister Ioannis Kasoulides  said on Thursday they could last "about a month".                

On Friday, easing a ban on cheque payments, Cypriot  authorities said cheques could be used to make payments to  government agencies up to a limit of 5,000 euros. Anything more  than 5,000 euros would require Central Bank approval.                

The bank also issued a directive limiting the cash that can  be taken to areas of the island beyond the "control of the  Cypriot authorities" - a reference to Turkish-controlled  northern Cyprus which considers itself an independent state.  Cyprus residents can take 300 euros; non-residents can take 500.                

Under the terms of the capital controls, Cypriots and  foreigners are allowed to take up to 1,000 euros in cash when  they leave the island.

Via: HuffingtonPost