European Economy: All Eyes On Cyprus as Bail Out Talks Wrap Up Early

FIERCE negotiations to resurrect a deal for the EU and the IMF to bail out Cyprus appear to have wrapped up early.

Early reports state that a preliminary agreement is in place to hit Bank of Cyprus depositors with a massive levy – as much as 40 per cent on deposits of more than 100,000 euros pending endorsement by Eurogroup finance ministers. President Nicos Anastasiades had earlier proposed a 10% levy to make up around one third of the overall EUR 17 billion needed for the bail out, increasing that number to 20% prior to going into the talks with other Eurogroup politicians, the heads of the ECB and IMF, talks which lasted for more than 10 hours.

Waiting Eurogroup finance ministers are now set to go over the new plan with a view to approval.

The deal hammered out would see the bank, which carries one third of all holdings, survive.

But this would come at a massive price for investors, which one senior EU source said could be as high as 40 per cent.

Another senior EU source said there would be no levy — a major U-turn from last week’s collapsed deal to clobber all savers on the island.

But Cyprus’s second bank, Laiki, would be wound up as part of the agreement, he added.

Smaller account-holders will be covered by the EU’s deposit guarantee legislation, which runs to the 100,000-euro threshold, while those above that level face a hefty haircut.

The negotiations were aimed at pulling together some seven billion euros, mainly from the Cypriot banking sector, to unlock a 10-billion-euro ($A12.51 billion) loans package from eurozone partners and the International Monetary Fund.

A major sticking point throughout the talks was a European Central Bank demand for the Bank of Cyprus to pay a nine-billion-euro bill due to Frankfurt.

A senior policymaker at the ECB also served Cyprus notice that it would be given little leeway in the crucial talks by predicting that the island’s financial woes would not tip its eurozone peers into economic crisis.

The general view from the rest of the eurozone’s political and banking heads seems to be that the Cypriot economic model – with its reliance on offshore banking and Russian money – was unsustainable and that the current system would no longer able to continue.

In more positive news, there are clear signs of improvement in Spain, Portugal and Ireland and no massive economic problems in Italy. Cyprus accounts for only 0.2% of eurozone GDP.

Global shipping has a long tradition in Cyprus, a flag of convenience for much of the oil and aggregate shipping fleet. While the heavy lift and breakbulk shipping lines may have a smaller connections to the island state, there are fears that the Cyprus banking crisis threatens bunker and shipping firms, as those with deposits in Cyprus might have to scramble for new ways of financing their working capital.

Much of the recent discussion has been on the presence of undetermined oil and gas fields near the island that Gazprom is said to be interested in. The heavy lift and project cargo lines will no doubt be hoping to take advantage of oil and gas exploration and extraction opportunities once the crisis is resolved.

News that there might be a deal in Brussels has sent the euro rising around half a cent, up at $1.3033 against the US dollar (from $1.297 a few minutes earlier).