Cyprus has been helped by the European Union and the IMF. The loan will be € 10bn. This is huge, more than 50% of GDP as Cyprus GDP was € 17.9bn in 2012. This will bring public debt to GDP ratio from 90% to 140%. The requested plan from Cyprus was € 17bn which was too huge to manage. It is not thinkable to have a rescue plan of almost 100% of GDP and then there is a problem of debt sustainability. Even with 140 % there is a strong risk of unsustainability.
The remaining € 7bn will come from privatization receipts and higher corporate taxes for € 1.4bn and the rest will come from tax on bank deposits. From the first negotiation tax rate will be 6.75% for deposits below € 100 000 and 9.9% for deposits above € 100 000. (But since Sunday afternoon there are discussions on this issue to reduce tax rate for deposits below € 100 000 probably at 3 or 3.5% and increase tax rate to 12.5% for deposits above € 100 000. There is still an uncertainty because it is possible to have 2 tax rates: one for deposits between € 100 000 to € 500 000 and one above € 500 000). Continue reading →