Cyprus has become the fifth eurozone country to seek help from international lenders, but the rescue package includes a hugely unpopular levy on savers at Cypriot banks – and it remains unclear on Sunday whether MPs will accept it.

What was agreed in the bailout deal?

Cash-strapped Cyprus will receive around €10bn (£8.7bn) to strengthen its economy and recapitalise its battered banks.

But in a radical departure from previous rescue packages, savers across the Cypriot banking sector are also being forced to contribute to the deal through a compulsory levy on their deposits that will raise €5.8bn.

Hang on, savers are being taxed to help prop up Cyprus’s economy?

Technically they are being “bailed in” – and will receive equity (bank shares) in return. But yes, in effect it’s a tax on all savers.

Those with under €100,000 will lose 6.75%, rising to 9.99% for those with over €100,000 in the bank.

Aren’t savers meant to be insured against losses when banks go bust?

Absolutely. Cyprus’s deposit protection scheme states deposits up to €100,000 are protected. But in this case the banks haven’t collapsed, so it doesn’t apply.

Has this happened before?

Not within the eurozone.

How has it been received in Cyprus?

With shock and fury. Bailout negotiations have been running for months, but people had been assured that bank deposits were not at risk. There is particular anger that Cyprus is being singled out – as previous rescue packages did not punish savers. One man even drove his bulldozer to his local branch and threatened to break in (but didn’t).

Has it triggered a bank run?

No. There were queues at savings banks on Saturday, and reports that ATM machines were unable to pay out cash. There is a scheduled bank holiday on Monday, and the Cypriot government has frozen electronic transfers this weekend.

The levy will be imposed on balance levels when the deal was struck, so savers can’t escape it.

Why did Cyprus swallow such a bitter deal?

President Nicos Anastasiades said the alternative was “disorderly bankruptcy”, as Cypriot banks would have collapsed without the support of the European Central Bank.

Will it definitely happen?

No. The Cypriot parliament was due to vote on the measure on Sunday. But the vote was dramatically postponed until Monday, leading to speculation that the government doesn’t have enough support. Anastasiades, who was elected president only last month, does not control a majority in the Nicosia parliament.

How is raiding savers justified?

Officially, because the deal will protect the Cypriot banking sector.

Jeroen Dijsselbloem, the Dutch finance minister, who chairs the eurogroup of finance ministers, told reporters: “As it is a contribution to the financial stability of Cyprus, it seems ‘just’ to ask a contribution of all deposit holders”.

And unofficially?

There were concerns, particularly among German politicians, that a bailout would reward the many Russians who use the Cyprus banking system. The large number of transfers between the two countries has led to suspicions of possible money laundering. Thus the insistence that savers should share the burden.

Why does Cyprus need rescuing?

Cyprus has been badly hurt by the crisis in Greece, its close neighbour and trading partner. Demand for Cypriot goods from Greece has fallen since the Greek recession began. And crucially, Cypriot banks held large quantities of Greek sovereign bonds, meaning they suffered heavy losses when the debt was restructured.

Another factor is that Cyprus’s banking sector is around eight times as large as its GDP, according to some estimates. Thus the government couldn’t bail its banks out itself (as the UK did with RBS and Lloyds in 2008).

Is this bad news for Brits in Cyprus?

Yes, expats with savings in Cypriot banks will be hit. However, the chancellor, George Osborne, announced on Sunday morning that the government will compensate soldiers and civil servants based in Cyprus. In total, British savers hold around €2bn in banks in Cyprus, so would lose around €170m.

Are savers in other countries in the eurozone also at risk?

Top Brussels officials insist not. Olli Rehn, European commission vice-president, described the Cypriot levy as a one-off that would not be applied in other cases (because of the huge size of its banking sector related to the country’s whole economy). No other countries are seeking a bailout at present, as Spain and Italy’s borrowing costs have fallen in recent months. Spain has also already agreed a deal to strengthen its own banks, which did not include a levy on savers.

Having said that, savers in southern Europe must be looking at Cyprus and wondering if their savings are as safe as they thought. That could potentially hit confidence in local banks (although at this stage there are no reports of alarm).

How has the deal gone down in the City?

Badly. Sebastien Galy of Société Général predicted: “This will probably go down as an ill-thought-out rescue plan with consequences for peripheral Europe.”

And SocGen’s chief economist, Michala Marcussen, warned: “The package for Cyprus still comes with tough conditionality and the risk is that introducing a new ‘unique’ bank levy measure – despite the many reassurances – could trigger renewed concerns.”

Have any European politicians spoken out?

Sharon Bowles MEP, chair of the European parliament’s economic and monetary affairs committee, said she was appalled by the savings levy, saying it “robs smaller investors of the protection they were promised”.

Bowles added: “If this were a bank, they would be in court for mis-selling.”

“The lesson here is that the EU’s single market rules will be flouted when the eurozone, ECB and IMF say so. At a time when many are greatly concerned that the creation of the ‘banking union’, giving the ECB unprecedented power, will demote the priorities of the single market, we see it here in action.”

Could it happen in the UK?

There is no suggestion that British banks could impose such a levy.

RBS and Lloyds were recapitalised by the UK government in 2008, while Barclays managed to strengthen its capital reserves by tapping external investors. All British banks are able to borrow on the international markets. And the British goverment can also borrow at low interest rates.

Britain also has a deposit protection scheme, which was beefed up after the collapse of Northern Rock in 2007.

What else did Cyprus have to agree to?

The government has promised to raise its corporation tax rate, and also privatise some state assets. The country’s union has pledged to fight the asset sales.

So Cyprus isn’t safe yet, despite this unpopular bailout?

No.

http://www.guardian.co.uk/world/2013/mar/17/cyprus-savings-levy-questions-and-answers