Cyprus bank de­posits to be taxed in $13 bil­lion bailout

The Pak Banker - - COMPANIES/BOSS -

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.

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