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EU says no change in South’s bailout terms

19 June 2013

Following reports of a leaked letter in which South Cyprus President Anastasiades wrote to the EU asking for a revision of the terms of the bailout, EU officials have said that they do not intend to change the terms of the bailout as he has requested.

Even though Anastasiades did not specifically ask for more money he indicated that the Cypriot economy could not cope unless the terms of the rescue package are altered.

“It is my humble submission that the bail-in was implemented without careful preparation,” Anastasiades said in the letter, which the Financial Times and Wall Street Journal reported on Tuesday.

“The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus’ turn to seek help.”

But EU officials said there was no intention to alter the terms of the loans agreed with Cyprus or to supply more funds. The sources suggested Anastasiades was aware any changes were unlikely, but wanted to send a message to a domestic audience.

Asked if the terms of the bailout could be changed, one senior EU policymaker said: “No, not as far as I can see.”

Eurozone finance ministers will discuss the letter at a meeting in Luxembourg on Thursday.

A second official said: “There’s no chance we’ll revise the terms of the bailout, but we’ll discuss it on Thursday.”

A third confirmed no change was possible in the short-term, but said there could “potentially” be adjustments in the medium term, as was the case of Greece. However, that also depends on eurozone leaders, who will meet on June 27-28.

Earlier, quoting an unnamed senior eurozone official, the Financial Times reported that EU officials were “puzzled” by the letter.

“Essentially he is asking for a complete reversal of the programme,” the official said, according to the FT.

The official added that the failure to prepare for the bailout’s impact was partially the fault of Anastasiades’ government, which initially voted down a rescue package mid-March before accepting a similar deal nine days later.

Cyprus’ parliament rejected the initial conditions of the bailout, which called for imposing losses on both insured – under €100,000 — and uninsured bank deposits.

The plan was to add a €6.9 per cent tax on deposits in all banks under €100,000 and 9.9 per cent above that.

The plan had been doomed to fail from the onset as main opposition AKEL, EDEK and government partners DIKO rejected it before it even went to the vote.

Ruling DISY abstained.

Nine days later, the Eurogroup decided that Laiki Bank, the island’s second-biggest, would be closed and uninsured deposits in the Bank of Cyprus (BoC) will be used to recapitalise the lender.

It had become a take it or leave it deal with the European Central Bank (ECB) threatening to pull the plug on emergency liquidity to Laiki, which would have meant its immediate collapse and possibly that of BoC shortly afterwards.

The process, known as a ‘bail-in’, was a first in the history of the eurozone debt crisis.

Thousands of depositors lost their savings, and subsequent capital controls were imposed to prevent a drain on remaining deposits.

Those controls are largely still in place.

“It is my humble submission that the bail-in was implemented without careful preparation,” Anastasiades said in the letter.

The president said there was no clear understanding of how a bail-in would be implemented, legal issues were being raised and there were major delays in completing the process.

No distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as company working capital.

“An alternative, longer term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system,” the letter said.

Anastasiades also took a shot at the ECB for continuing to provide Laiki with emergency liquidity assistance (ELA), which reached around €9.0 billion.

The amount, along with €2.0 billion extra, is now burdening the BoC.

The ECB has defended the decision, arguing the possibility of a future recapitalisation with public money meant it was still viable at the time.

It has also said that ELA was the responsibility of the national regulator – the Central Bank of Cyprus.

However, critics point out that the ECB could have pulled the plug earlier if it wanted, just as it did on March 25.

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