Cyprus bank deposits to be taxed in $13 billion bailout
Euro-area finance ministers agreed to an unprecedented tax on Cypriot bank deposits as officials unveiled a 10 billion-euro ($13 billion) rescue plan for the country, the fifth since Europe’s debt crisis broke out in 2009.
Cyprus will impose a levy of 6.75 per cent on deposits of less than 100,000 euros — the ceiling for European Union account insurance — and 9.9 per cent above that. The measures will raise 5.8 billion euros, in addition to the emergency loans, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters early today after 10 hours of talks in Brussels. The International Monetary Fund may contribute to the package and junior bondholders may also be tapped in a socalled bail-in, the ministers’ statement said.
Officials have struggled to find an agreement that would rescue Cyprus, which accounts for just half of a per cent of the euro region’s economy, without unsettling investors in larger countries and sparking a new round of market contagion. Finance Minister Michael Sarris said the plan was the “least onerous” of the options Cyprus faced to stay afloat.
“This decision should not be compared to the ideal, but to the very real possibility that much more money could have been lost in a bankruptcy of the banking system or indeed of the country,” Sarris said in Brussels.
“Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders,” according to a statement released by ministers after the talks. It didn’t specify whether bank or sovereign bond holders could be affected.
The European Central Bank will use its existing facilities to make funds available to Cypriot banks as needed to counter potential bank runs. Depositors will receive bank equity as compensation.
While the tax on deposits carries some risks of setting a precedent for other countries in the euro area, the ECB has shown it’s prepared to do what it takes to preserve the currency union, said Holger Schmieding, chief economist at Berenberg Bank in London.
“We are optimistic that it will not spark massive contagion,” Schmieding said in a note. “Still, with the unprecedented haircut on Cypriot bank deposits we are in uncharted territory again.”
The tax on deposits, as well as hurting wealthy Russians with money in Cypriot banks, will also sting ordinary citizens. Some ATMs in the country ran out of cash, Erotokritos Chlorakiotis, general manager of the Cooperative Central Bank, told state-run CYBC.
Funds to pay the levy were frozen in accounts immediately, ECB Executive Board Member Joerg Asmussen said. The levy will be assessed before Cypriot banks reopen on March 19 after a March 18 national holiday. Sarris said electronic transfers will also be limited until then.
“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem said, noting the country’s financial industry was five times the size of its economy. The plan includes “unique measures” that address the “exceptional nature” of Cyprus and show “inflexible commitment to financial stability and the integrity of the euro area.”
The IMF will consider contributing money to the rescue, said IMF Managing Director Christine Lagarde, who travelled to Brussels for the talks. “We believe that the proposal as outlined by Jeroen.