Cypriot ministers were trying yesterday to revise a plan to take money from bank deposits before a parliamentary vote today that will secure the island’s financial rescue or could lead to its default, with reverberations across the euro zone.
The weekend announcement that Cyprus would impose a tax on bank accounts as part of a e10 billion (R118bn.) bailout by the EU broke with previous practice that depositors’ savings were sacrosanct.
The country’s banks would remain closed until Thursday, a central bank official said, amid fears of a run on accounts by customers.
“The banks will remain closed [today] and Wednesday,” the official told AFP. With yesterday a public holiday, banks have not reopened since the stringent terms of the EU deal were announced on Saturday.
Before the vote, which is too close to call, the government was working to soften the blow to smaller savers by tilting more of the tax towards those with deposits greater than e100 000. Many of these depositors are Russians and the planned levy has elicited an angry reaction from President Vladimir Putin.
The government says Cyprus has no choice but to accept the bailout with the tax on deposits, or go bankrupt. A Cypriot source told Reuters the introduction of a tax-free threshold for smaller bank deposits – maybe up to e20 000 – was under discussion but not yet agreed on.
The parliamentary speaker said debate on the bank levy would be delayed until 5pm in Brussels today.
The euro zone has indicated that changes would be acceptable as long as the return of around e6bn was maintained. If the Cypriot parliament votes the deal down, the euro zone would face a risk of being dragged back into crisis.
“It is up to the government alone to decide if it wants to change the structure of the… contribution [from] the banking sector,” European Central Bank policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, said on the sidelines of a Berlin conference. “The important thing is that the financial contribution of e5.8bn remains.”
Residents on the island emptied cash machines to get their funds over the weekend. The move also unnerved depositors in the euro zone’s weaker economies. Investors feared a precedent that could reignite market turmoil that the European Central Bank has calmed in recent months with its pledge to do whatever it takes to save the euro.
“The most important question is what would happen the following day if the bill isn’t voted,” Cyprus central bank governor Panicos Demetriades told parliament. “What would… happen is that our two big banks would need to be consolidated. This doesn’t mean that they would be… destroyed. We will aim for this to happen in a completely orderly way.”
Cyprus’s banking sector dwarfs its economy and its banks have been severely hurt by exposure to Greece.
Brussels emphasised that the measure was a one-off for a country that accounted for just 0.2 percent of EU output. The worst fear is that savers in larger European countries become nervous and start withdrawing funds, although there was no immediate sign of that.
US economist Paul Krugman wrote in The New York Times: “It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘Time to stage a run on your banks!’” –Reuters