CYPRUS: Deal needed dearly,
Parliament OKS levy on larger bank accounts as deadline looms
As Monday’s deadline inches closer, Cypriot officials hope they are close to a deal that will both keep European creditors happy and emergency funds flowing.
Cyprus, teetering on the brink of bankruptcy, is running out of options. The Russians, who hold nearly $32 billion in bank deposits on the tax-haven island, have refused to bail out the Cypriots.
And earlier this week the Cypriot parliament steadfastly refused to impose a tax of 6.75 per cent on all bank deposits of $133,000 or less and a 9.9-per-cent tax on those with more than that. MPs called the European Union’s idea “bank robbery.”
The tiny Mediterranean island was handed an ultimatum by the European Central Bank, the European Commission and the International Monetary Fund to come up with $7.7 billion in financing in exchange for a $13.3-billion rescue package.
If Cyprus can’t come up with the money by Monday, the EU will stop the flow of emergency liquidity financing that is keeping the Cypriot banking system afloat. The country would then have to leave the eurozone, the 17 nations that share a single currency.
Late Friday, Cypriot legislators adopted legislation that allows the government to split the island’s failing lenders into good and bad banks.
The law is likely to be applied first to the Cyprus Popular Bank, Cyprus’s second largest, separating all small deposits of less than $133,000 into a “good” bank and all larger deposits into what some are calling a “bad” bank. Levies would be imposed on the higher deposits.
A banking official said levies of 25 to 30 per cent were being discussed. However, even with the restructuring, Cyprus will not be able to raise enough funds. The EU and the IMF must vote on whether they will accept Cyprus’s solution.
The government is reportedly thinking of raising more money by taxing deposits with the Bank of Cyprus, the country’s biggest.
Takis Phidias, the acting CEO of Cyprus Popular Bank, condemned the plan. “I’m certain that there will be chaos after these bills are approved.” Luxembourg Finance Minister Luc Frieden took a grimmer look. Cypriot banks “are not viable,” he said. “I see little wiggle room with some European countries, also financially, to make more concessions toward Cyprus. Time is slipping away,” said Frieden. “Banks will open again in Cyprus on Tuesday and a solution is absolutely necessary because this is not just about Cyprus, it also concerns Germany, Luxembourg and the stability of the eurozone. We need a credible plan.” John Kirton, director of the University of Toronto’s G8 Research Group, said the logic underpinning the Europeans’ insistence on a levy is evident. “The Cypriot banks had no bondholders. You couldn’t tell them to take a haircut, like Greece. You had to go after the depositors,” Kirton said. Levies have been used before, he said. Italy’s then prime minister, Giuliano, Amato imposed a levy in 1992 — but capped it at 0.6 per cent. “You can see why the Italians didn’t rise up. But 6.75 per cent is . . . mystifying,” Kirton said. With files from Star wire services