Frantic day ahead as EU tells Cyprus it can rethink controversial bailout terms as key vote postponed
Cyprus postpones crucial vote on controversial bank deposit levy as stocks plummet around the world
John Hall is Senior Online Reporter at The Independent. He also writes a column on new music for the newspaper.
A C Grayling
A. C. Grayling is an English philosopher and founder of independent undergraduate college, New College of the Humanities. He is the author of several books including The Refutation of Scepticism (1985), The Meaning of Things (2001) and The Good Book (2011).
Tuesday 19 March 2013
Banks will remain closed across Cyprus today after the President again delayed a parliamentary vote on a tax on savings, buying time to renegotiate the terms of a bailout with the European Union and International Monetary Fund (IMF) and prevent the island's exit from the single currency
The government is desperate to stop a run on the banks after a deal agreed with the 17 eurozone finance ministers in Brussels on Saturday imposed a tax of up to 9.9 per cent on deposits, sending people rushing to cash machines to try to withdraw their money.
President Nicos Anastasiades was in talks with MPs yesterday to try to reach a consensus on a package to take back to the IMF, the EU and the European Central Bank. Opposition politicians had indicated they would vote against the current deal – a vote that could potentially force Cyprus to default on its debts and leave the euro.
Eurozone finance ministers put out a statement last night saying they were willing to tweak the terms of the deal, including putting less of a burden on Cypriots with modest savings, as long as the total amount raised stayed the same. "The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below €100,000," the statement said.
As public anger on the island grew, Russia's President Vladimir Putin yesterday joined strong criticism of the move. “Putin said such a decision, if taken, would be unjust, unprofessional and dangerous,” a spokesman said in a meeting with economic advisers. Russian companies have an estimated £12.5 billion in the country.
And yesterday Joerg Asmussen, a member of the European Central Bank's governing council, said the exact terms of the bailout were still down to the Cyprus government.
He said: "It's the Cyprus government's adjustment programme. If Cyprus' president wants to change something regarding the levy on bank deposits, that's in his hands. He must just make sure that the financing is intact.
"The important thing is that the financial contribution of €5.8bn remains."
The mooted levy was supposed to provide that contribution. Under the plan, people with up to €100,000 (£87,000) in Cypriot bank accounts would pay a 6.75 per cent levy, while those with more money would pay 9.9 per cent.
And Steffen Seibert, a German government spokesman, said: "How the country makes its contribution, how it makes the payments, is up to the Cyprus government."
After trading at a five year high of over 6500 in recent days, the FTSE 100 Index slumped this morning 100 points following the new President of Cyprus' attempt to gather parliamentary support for the bailout.
Japan's Nikkei ended the session more than 2.5 per cent lower, while Germany's DAX fell 1.2 per cent to 7,944 and the CAC-40 in France was 1 per cent lower at 7,945. In London, banks were among the biggest fallers.
The levy was greeted with fury across Cyprus, with many expected to withdraw their savings from banks to avoid being hit by the tax.
If parliament eventually votes in favour of the plan, Cyprus will be eligible for a €10 billion (£8.5 billion) bailout from its partners in the eurozone and the International Monetary Fund.
Though Cyprus accounts for only around 0.2 per cent of the combined output of the 17 European Union countries that use the euro, the tax on depositors has stoked fears of bank runs in other troubled European economies.
Since the European debt crisis began in late 2009, savers have been spared. In Cyprus there was anger that a better deal was not hammered out in Brussels on Friday. No other bailouts for struggling eurozone countries have put the burden so directly on citizens.
“The situation is unacceptable, they have fooled people. We’re being destroyed,” a woman outside a bank said. One Cypriot drove his digger to a bank and threatened to destroy it. “I’m protesting what they’re doing to our savings,” Christos Karandokis, the driver, told State television.
“In the medium term the decision taken regarding the loss on bank deposits could have major ramifications for the eurozone if the European debt crisis re-escalates,” said Gary Jenkins, managing director of Swordfish Research. “What I find most surprising is that they are prepared to take such a major gamble to save such a small amount of money.”
Russians have for years seen Cyprus as an investor-friendly jurisdiction with lax banking regulations and low taxes.
Cyprus' banking sector is about eight times the size of the economy and has been accused of being a hub for money-laundering, particularly from Russia. That's why many European officials wanted to have the banks' depositors involved in the cost of the bailout.
And German finance minister Wolfgang Schaeuble said that an eventual no vote by Cypriot lawmakers would have huge repercussions in the country.
“Then the Cypriot banks will no longer be solvent, and Cyprus will be in a very difficult situation,” said Schaeuble, who insisted that every country involved in Europe's debt crisis is different. In the case of Cyprus, he said bank owners and investors had to participate in the rescue.
“It can't be done any other way if we want to avoid insolvency,” he said.
“If European policy makers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job,” said Michael Hewson, senior market analyst at CMC Markets.
€14bn: The size of the Cypriot government's debt, which is 75 per cent of the country's GDP
€10bn: The size of the proposed EU bailout
€1,350: The amount that someone with €20,000 in their account would lose under the proposals for a 6.75% tax on bank accounts below €100,000
9.9 per cent: The proposed tax rate on accounts containing more than €100,000
€5.8bn: The amount that the bank taxes are expected to raise. €43bn of the €68bn in bank deposits is held by Cypriots. Britons hold €2bn
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