Cyprus Deposit-Tax Passage in Doubt

If the legislature rejects the levy, the nation risks losing its membership in the euro.

Cypriot lawmakers may shoot down an unprecedented levy on bank deposits, risking the island’s membership in the euro.

The “feeling I’m having is that the house is going to reject it because they feel and think it isn’t just and that it’s against the interest of Cyprus,” Cypriot President Nicos Anastasiades told Sweden’s TV4 channel in an interview today.

The Mediterranean island nation’s banks and stock exchange will remain closed at least until March 21 amid speculation lawmakers may postpone the vote that’s planned for later today. The 5.8 billion-euro ($7.5 billion) raid on bank accounts, intended to cut the cost of a rescue package to 10 billion euros, sparked outrage when Cypriots woke March 16 after marathon talks in Brussels to find bank transfers blocked.

Finance chiefs from the 17-member euro area late yesterday urged Cyprus to spare small-scale savers, while keeping unchanged the size of their demand on account holders. While Cyprus accounts for less than half a percent of the euro economy, the fight over the bank tax risks triggering new turmoil in the financial crisis that began in 2009 in Greece.

“I don’t think about plan Bs,” French Finance Minister Pierre Moscovici said in Paris today. “We’re in a plan A. Everyone has to assume his responsibilities.”

Finance ministers backtracked on the levy’s structure, which initially called for a 6.75 percent tax on deposits under 100,000 euros and 9.9 percent over that amount. The levy should now be more progressive, though must yield the same amount.

“Things were confused” after the measures was announced, Moscovici said. “The perception was confused. Once this confusion was born, we had to revisit the decision.”

The euro, which tumbled 0.9 percent yesterday, traded little changed today at $1.2934 as of 11:54 a.m. Frankfurt time. European stocks fell for a third day, with the Stoxx Europe 600 Index down 0.4 percent. Spanish 10-year bonds fell, with the yield climbing to as high as 5 percent.

European policy makers would consider ramping up pressure on Cyprus in the event of a breakdown over the deposit tax, which Moscovici called breaking a “taboo,” said a European official who asked not to be named. Among the potential measures is cutting off funds to the nation’s banks through the European Central Bank’s Emergency Liquidity Assistance program.

“There is no precedent for what would happen if Cyprus rejected the conditions,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note. “Our best guess is that Europe would give Cyprus a brief and final chance to rethink and vote again.”

A complete rejection of the measure would forego European assistance and could lead to a sovereign default, or even an exit from the currency union, Schmieding said.

 

‘Serious Blunder’

“What we have seen in the last few days is a very serious blunder by European governments that essentially are blackmailing the government of Cyprus to confiscate the money that belongs rightfully to depositors,” former Cyprus central banker Athanasios Orphanides said today on “Bloomberg Surveillance” with Tom Keene. “It’s not clear how this can affect in a positive manner the European project going forward.”

Once banks on the island reopen, the country could see more than 7 billion euros in outflows, or about 10 percent of the total, state-run RIK TV cited Central Bank Governor Panicos Demetriades as telling a parliamentary committee.

Anastasiades was rebuffed in a call to German Chancellor Angela Merkel yesterday. Merkel told him that he can only negotiate a rescue with the so-called troika, which comprises the European Commission, the ECB and the International Monetary Fund, according to a German government official.

The bank levy and additional tax measures reduced the overall rescue package to 10 billion euros from about 17 billion euros to meet the IMF’s demand for debt sustainability and German politicians’ skepticism over financial transfers.

German Finance Minister Wolfgang Schaeuble said there was no other option if the troika wanted to keep the price tag for the bailout at 10 billion euros.

“Naturally, the Cypriot president tried to find a way around it, but there was none,” Schaeuble said in an interview on Deutschlandfunk today. He added that the levy doesn’t violate deposit guarantees, because such protections are “only as good as a state’s solvency.”

Anastasiades, whose Disy party holds 20 seats in the country’s 56-seat legislature, will need the support of other political factions, some of which have said they’ll vote no.

The decision, unveiled at a 4:30 a.m. press conference in Brussels on March 16, set off a wave of criticism from investors and officials that a bank run could spark a return to market panic that’s been a hallmark of the euro crisis.

Russian President Vladimir Putin called the tax “unfair, unprofessional and dangerous,” according to a statement posted on the Kremlin website. Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody’s.

The U.S. Treasury Department is “monitoring the situation in Cyprus closely,” and Secretary Jacob J. Lew has been speaking with his European counterparts, the department said in an e-mailed statement yesterday.

 

Bloomberg News

 

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