Cyprus bailout spooks markets as banks told to stay closed until Thursday

Investors fear raids on bank accounts in other countries after Cypriot rescue deal is hailed by eurozone finance chief

Financial markets dropped yesterday after the influential head of the eurozone's finance ministers appeared to suggest that the Cypriot bailout deal was a model for future European rescues.

Stock markets had opened strongly following news that a bailout for Cyprus – which included a levy on savers with assets over €100,000 – had been agreed. But the comments from Jeroen Dijsselbloem saw the euro fall more than a cent against the dollar and shares in a number of banks slump as traders rushed to sell their stakes in institutions in the eurozone's most indebted economies.

In France, Societé Générale shares fell 5.7 per cent to €25.82, while Italy's UniCredit dropped 5.3 per cent to €3.39. Spain's Bankia, which has recently been through a recapitalisation programme of its own, fell 37.5 per cent to €0.15. "What we've done last night is what I call pushing back the risks," Mr Dijsselbloem told Reuters. "If there is a risk in a bank, our first question should be 'OK, what are you in the bank going to do about that? What can you do to recapitalise yourself?'

"If the bank can't do it then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit-holders."

Mr Dijsselbloem's spokeswoman moved swiftly to "clarify" her boss's comments, claiming that the issue of Cyprus being used as a template had been taken out of context. Later, Mr Dijsselbloem himself issued a statement insisting that Cyprus was a "specific" case faced with "exceptional challenges", though by that stage the damage had been done.

The day began optimistically after more than 12 hours of talks in Brussels between Cyprus's President Nicos Anastasiades, leaders of the Troika (International Monetary Fund, the European Central Bank and the European Union) and eurozone finance ministers ended in the early hours of yesterday morning with a deal that will see Cyprus Popular Bank (also known as Laiki), the country's second largest, shut down. Its toxic assets – and any deposits above €100,000, below which funds are insured by the European Union – will be transferred into a Northern Rock-style bad bank.

The remainder of its funds will be merged into the Bank of Cyprus, whose customers with assets above €100,000 will have their accounts frozen and be forced to pay a tax of anywhere between 30 and 40 per cent of their savings. The funds generated from the tax will be converted into shares in the bank which, added to money from a series of privatisations and tax increases, will raise the €5.8bn required by Cyprus to trigger a further €10bn bailout from Europe.

The talks were at times fractious, with Mr Anastasiades reportedly asking IMF chief Christine Lagarde at one point whether she was looking to remove him from his job. But a deal was agreed just hours before the ECB's deadline that would have seen emergency funding for the banks withdrawn. Without the money, both would have gone bust and the island would have been forced out of the euro.

German Chancellor Angela Merkel praised the deal, saying: "The result that was found is right." She said the structure "makes those who helped cause these undesirable developments play their part", a reference to the wealthy Russian investors at whom the levy on deposits is targeted.

But not everyone was so welcoming. The outcome of the talks was described as "painful" by President Anastasiades last night, who also expressed his disappointment at the attitude of Cyprus's European partners. The chairman of the Cypriot parliament's finance committee, Nicholas Papadopolous, told the BBC earlier in the day: "We are heading for a deep recession. They wanted to send a message that the Cypriot economy ought to be destroyed, and they've succeeded." Analysts from SocGen predicted Cyprus could lose 20 per cent of its GDP over four years.

In Nicosia, the deal was met with despair. Giannis, a 78-year-old businessman, wiped the tears from his eyes as he wondered how he'd repay the loans he took out to boost his business. "I've survived many storms in my life, but this one will be the toughest," he said.

The island's banks – with the exception of Laiki and Bank of Cyprus – were due to reopen today but last night the Central Bank said they would remain closed until Thursday. Limits have been set on the amount account holders can withdraw, and "temporary" capital controls will be imposed to prevent a bank run.

The deal will not need approval by Cyprus's parliament as it is classified as bank restructuring, not a tax, but several eurozone states, including Germany, still need to vote it through.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Sales Executive or Senior Sales Executive - B2B Exhibitions

£18000 - £30000 per annum: Recruitment Genius: A Sales Executive or Senior Sal...

Recruitment Genius: Head of Support Services

£40000 - £55000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Warehouse Team Leader

£22000 per annum: Recruitment Genius: This industry leading company produces h...

Recruitment Genius: Business Development Manager / Sales - OTE £40,000

£20000 - £40000 per annum: Recruitment Genius: This IT provider for the educat...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future