Cyprus bank raid pushes Europe into uncharted waters

Europe's debt crisis tsar has promised that an unprecedented raid on the bank accounts of Cypriots will not be repeated.

Euro-area finance ministers agreed to a tax on Cypriot bank deposits as officials unveiled a €10billion ($A12.57 billion) rescue plan for the country, the fifth since Europe's debt crisis hit in 2009.

In a move that has caused shock and dismay among its citizens, Cyprus will impose a levy of 6.75 per cent on deposits of less than €100,000 - the ceiling for European Union account insurance - and 9.9per cent above that.

Asked whether a future EU-mandated bank levy can be categorically ruled out, Olli Rehn, who is the European Union Economic and Monetary Commissioner, said that "it can and there is no concrete case where it should be considered".

Mr Rehn said he did not expect an adverse market reaction to the precedent-setting tax on deposits both above and below the insured limit of €100,000.

"Market forces understand that the sheer size of the problem of the Cypriot banking sector and its troubles were so huge that we needed to take very substantial measures," he said.

"This kind of stability fee is clearly a much better choice from the point of view of financial stability and Cypriot citizens than a full-scale bail-in, which would have led to very chaotic consequences in the Cypriot economy."

However, analysts said the move would increase pressure on the euro. Holger Schmieding, chief economist at Berenberg Bank, said the risk it could backfire was "not zero" and Europe was in "unchartered territory again".

The measures will raise €5.8 billion, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters after 10 hours of emergency talks in Brussels.

The euro region's bailout kitty and, possibly, the International Monetary Fund will look to make up the shortfall. A partial "bail-in" of junior bondholders is also possible.

"Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders," European finance ministers said in a communique released after the talks.

The European Central Bank will use its existing facilities to make funds available to Cypriot banks as needed to counter potential bank runs. Depositors will receive bank equity as compensation.

Cypriot Finance Minister Michael Sarris said the plan was the "least onerous" of the options Cyprus faced to stay afloat.

"It's not a pleasant outcome, especially of course for the people involved," said Mr Sarris.

While the tax on deposits will hurt wealthy Russians with money in Cypriot banks, it will also sting ordinary citizens. Some ATMs in the country have run out of cash, Erotokritos Chlorakiotis, general manager of the Cooperative Central Bank, told state-run CYBC.

Funds to pay the levy were frozen in accounts immediately, ECB executive board member Joerg Asmussen said. The levy will be assessed before Cypriot banks reopen on March 19 after a March 18 national holiday. Mr Sarris said electronic transfers would also be limited until then.

"As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders," Mr Dijsselbloem said, noting the country's financial industry was five times the size of its economy. The plan includes "unique measures" that address the "exceptional nature" of Cyprus and show "inflexible commitment to financial stability and the integrity of the euro area". The IMF will consider contributing money to the rescue, said IMF managing director Christine Lagarde, who travelled to Brussels for the talks. "We believe that the proposal as outlined by Jeroen is actually sustainable," she said.

EUROPE MONEY WOES

September 15, 2008

Global credit markets freeze following the collapse of Lehman Brothers

May 2, 2010

Europe and the IMF announce €110 billion Greek bailout

May 7-9, 2010

European financial ministers create €500 European financial stability facility

August 4, 2011

The European Central Bank starts buying Italian and Spanish bonds as contagion fears spread

December 24, 2011

Cyprus borrows €2.5 billion from Russia to fund its 2012 financial needs

February 12, 2012

Greek parliament approves austerity measures

June 25, 2012

Cyprus formally requests a bailout from the EU and IMF

October 10, 2012

IMF admits austerity measures have hurt the European economy more than it originally thought

March 16, 2013

Cypriots learn their bank accounts are to be raided as part of a €10 billion bailout of the country’s banking system