* After Cyprus election, focus returns to bailout
* Germany, Finland, others want banks to share cost of
* Others concerned "bail-in" of depositors will spark bank
* Finance ministers to meet March 4, decision expected later
By Luke Baker and Michele Kambas
BRUSSELS/NICOSIA, Feb 25 European policymakers
are split over how to handle a bailout of Cyprus, with Germany
and some other countries pushing for bank depositors to bear
part of the cost and many other member states worried such a
move will cause a bank run.
Euro zone officials say momentum has built in recent days
behind the idea of "bailing-in" Cypriot bank shareholders and
depositors, although the specifics of how such an operation
would be carried out have not been pinned down.
Discussion over the bailout will resume in earnest this week
following the election of Nicos Anastasiades as Cyprus's new
president on Sunday.
Germany, Finland and the Netherlands are among those who say
taxpayers cannot be expected to go on financing euro zone
bailouts, saying it is time for owners and depositors in
risk-laden banks to accept losses on investments.
The concern is that announcing such a move will provoke the
immediate, large-scale withdrawal of deposits from all Cypriot
banks, where a large number of international investors,
including many Russian and British companies, hold accounts.
Euro zone finance ministers will discuss options at a
meeting in Brussels on March 4 but no decisions are expected,
officials say, making a further meeting later in March likely.
Thomas Wieser, who heads the group of senior officials who
prepare decisions of euro zone finance ministers, told Reuters
last week an international bailout should be ready by the end of
While Cyprus is the euro zone's third smallest economy with
annual GDP of only around 18 billion euros, a bank run could
have repercussions across the single currency bloc and re-ignite
the debt crisis, officials warn.
"We have to consider that risk," said one euro zone
officials whose country is undecided about whether a bail-in of
depositors is the right course of action. "It's a real option
but some countries don't want it."
UNBEARABLE COST OF A BAILOUT
The difficulty with Cyprus is finding a way to make a
bailout sustainable so any money leant to it is repaid.
The island needs up to 17 billion euros, including 8-10
billion to recapitalise its banks and 7 billion to repay loans
and finance ongoing government operations. That is equivalent to
virtually its entire annual GDP.
Such a rescue would increase Cyprus's debts to around 145
percent of GDP, a level considered unsustainable. Greece's
bailout calls for it to cut its debt-to-GDP ratio to 120 percent
by 2020, but that would also be unsustainable for Cyprus.
The International Monetary Fund and EU finance officials say
Cyprus needs to cut its debt to 90-100 percent of GDP before the
country is capable of paying back what it owes.
The alternative is to impose losses on investors in Cyprus
bloated banking sector, which is more than eight times bigger
than the economy. Doing so would greatly reduce the cost of the
bank recapitalisation and therefore the overall bailout.
The Cypriot banking system had deposits of 70 billion euros
at the end of December, with a third of that held by
non-residents, many of whom are Russian.
Olli Rehn, the European commissioner for economic affairs,
has played down the idea of a bail-in of depositors, saying it
is not the preferred option. But he still expects a far-reaching
overhaul of the island's banking system.
"Our intention is to ensure a fair burden-sharing of the
costs of restructuring and/or resolution of banks in accordance
with EU state aid rules," he said last month via his spokesman.
One bail-in proposal that has been raised is to freeze all
deposits over and above 100,000 euros -- the amount that is
guaranteed by existing EU rules.
That sum would be held in an escrow account for 15-30 years,
potentially earning very low interest, with the total used
either as collateral against loans or to shore up the banks'
Another option is to impose a retroactive tax on deposits
over 100,000 euros, which many depositors may be willing to pay
if the tax is not excessive and allows them to keep funds in
Cyprus, where the corporate tax rate is attractively low.
A third option that some officials have raised is to offer
Russia, which lent Cyprus 2.5 billion euros in 2011, a
debt-for-equity swap, with the loan exchanged for ownership of
the Cyprus Popular Bank, one of the island's most indebted.
"There are a range of options but nothing specific has been
put forward yet," one senior euro zone official whose country
favours a bail-in said. "We're not at the stage yet of
discussing how exactly it would be carried out."
For their part, Cypriot officials are determined there
should be no bailing-in of depositors, fearing any such proposal
will cause a flood of withdrawals and undermine the financial
model underpinning the economy.
Instead, newly elected President Nicos Anastasiades has
indicated a willingness to study the privatisation of state
assets and other measures to make a bailout pay for itself.
Another option would be to convince the Russians to extend
their loan, which must be repaid in 2016, possibly for up to 5
years, or for Cyprus to turn to another close historical ally,
Britain, to see whether it can offer a bridging loan.