The euro zone struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion),but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risks of a wider run on savings.
The eastern Mediterranean island becomes the fifth country after Greece,Ireland,Portugal and Spain to turn to the euro zone for financial help during the regions debt crisis.
In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country euro zone finance ministers forced Cyprus savers to pay up to 10 per cent of their deposits to raise almost 6 billion euros.
Almost half of its depositors are believed to be non-resident Russians,but most of those queuing on Saturday at ATMs to pull out cash appeared to be Cypriots.
I wish I was not the minister to do this, Cypriot finance minister Michael Sarris said after 10 hours of late-night talks in Brussels where the package was hammered out.
Much more money could have been lost in a bankruptcy of the banking system or indeed of the country, he said,adding that he hoped a levy and bailout would mark a new start for Cyprus.
Without a rescue,Cyprus would default and undermine the investor confidence in the euro zone that has been built up by the European Central Banks promise last year to do whatever it takes to shore up the currency bloc. The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks that were hit by a sovereign debt restructuring in Greece.
The deposit levy set at 9.9 per cent on bank deposits exceeding 100,000 euros and at 6.7 per cent on anything below that will take place on Tuesday after a bank holiday on Monday.
To guard against capital flight,Cyprus will take immediate steps to prevent electronic money transfers over the weekend.
In the coastal town of Larnaca,where irate depositors queued early to withdraw money from cash machines,co-op credit societies that are normally open on Saturdays stayed closed.
Im extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans, said British-Cypriot Andy Georgiou,54,who returned to Cyprus in mid-2012 with his savings.
The levy breaks a euro zone taboo by hitting bank depositors with losses.
It prompted Spain,considered the next most likely state to seek a sovereign rescue though supported in recent months by the ECBs debt promise,to deny savers in other countries risked being similarly penalised.