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Citi: Cyprus bailout deal getting closer

European officials reported by Reuters said yesterday a tax on the value of deposits is being considered in the negotiations on the Cyprus bailout, Citi said in a report published yesterday.

 A 5% tax has been mentioned, which would reportedly raise around €4bn and hence reduce the overall bailout bill from €15-€17bn to €10-€13bn, according to European officials reported by Reuters, citing the experience of Italy in 1992 (when a levy of 0.6% was withdrawn overnight from bank deposits). Additional taxes on corporate profits (from 10% to 12.5%), capital gains and financial transactions are discussed, which together with revenues from privatizations “could be enough to make Cypriot debt sustainable" one European official reportedly said, adding however that the IMF might decide not to contribute financially to the bailout, providing only expertise, as in the case of Spain.

Citi says that Cyprus bailout deal looks closer as convergence seems to be emerging on the size, contributors and means of the aid package. If approved, a deposit tax would de facto be a way of imposing losses on bank depositors (without calling it depositors’ bail-in), which satisfies the requests of core euro countries who wanted an oversized (and allegedly non-transparent) banking sector to make a large contribution to the bailout. The non-participation of the IMF as financial contributor, if confirmed, suggests that doubts about the sustainability of the debt remain high but that the Europeans are happy to overlook them in order not to derail the current positive market sentiment with threats of a new sovereign debt restructuring.

According to the report Greece – troika negotiations stuck on “range of issues”, including civil service dismissals, the continuation of the emergency property tax introduced in 2011 and recapitalization of Greek banks.

Citi expects that after major gridlock in autumn 2012 in the troika negotiations (which led to €34.3bn disbursement from the EFSF), the March agreement will be the first hurdle to overcome in 2013. The conditions set to achieve an agreement include progress on the reduction of in the number of public sector workers which has been one of the major stumbling blocks throughout the whole bailout programme.
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