With an immediate backlash from Cypriots that their savings would be taxed to help pay for an international bailout for the country’s failing economy, President Nicos Anastasiades took to national TV to tell them he will try to change the terms and protect small savers.
Parliament will vote on the plan on March 19, a day later than expected, and as the government has ordered the banks closed to prevent a run on deposits. Officials of the Eurozone forced the newly-elected Anastasiades, he said, to take a no-negotiation deal in which account holders with under 100,000 euros ($130,000) in Cypriot banks will have 6.75 percent of their money confiscated, and those over that amount will lose 9.9 percent.
There will also be a tax on earned interest up to 75 percent to help subsidize the 10 billion euros ($13 billion) bailout deal that will also involve the European Central Bank and International Monetary Fund, which, along with the EU, are also the lenders for Greece’s rescue.
But in a nationally televised speech, President Nicos Anastasiades also urged lawmakers to approve the tax, saying it is essential to save the country from bankruptcy. Some 25 lawmakers in the 56-seat Cypriot parliament said they wouldn’t vote for the tax amid deep resentment over a move some called disastrous. March 18 is a national holiday in Cyprus and Greece as the Orthodox faithful prepare for the lent season.
“I completely share the unpleasant sentiment that this difficult and onerous decision has caused,” Anastasiades said. “That’s why I continue to give battle so that the decisions of the Eurozone are amended in the next hours to limit the effect on small depositors.” He didn’t say why he didn’t oppose it in the first place as he had vowed to during his campaign. He’s been in office only a few weeks.
Anastasiades’ office also rushed to put out a statement denying reports that German Finance Minister Wolfgang Schaeuble, whose country insisted on tax under threat of having the deal voted down by the Parliament there, had offered to let small depositors off the hook.
Announcement of the decision late on a Friday night ahead of a three-day weekend sent Cypriots dashing to ATM machines trying to take out their money but some of the machines quickly ran out. Some analysts fear that even if the tax passes and the accounts are drained immediately for the tax that Cypriots will take out whatever is left and shut down the banks, which are holding 68 billion euros ($88 billion).
Some 40 percent of that is held by foreigners, and it was reported that Russians hold as much as 30 percent of the deposits. Lenders said they feared that Cyprus is being used as a money laundering haven for Russian mobsters and big business, but tax would hit even those with a single euro in the bank and there was no explanation why.
Russian President Vladimir Putin, whose country was considering offering a loan to Cyprus at the same time angrily attacked the decision as “unfair and dangerous” and there were reports he might not go ahead with the loan.
Critics said that the deposit tax, which some said is a raid on savings accounts in an unprecedented way could make depositors in other European countries doubt the safety of their savings. Greek officials immediately rushed to say that Greeks with money in Cypriot bank branches in Greece would not be affected and that the subsidiaries would be taken over by a Greek bank which hadn’t been named.
The Cypriot bailout follows those for Greece, Portugal, Ireland and the Spanish banking sector, and it is the first one that dips into people’s savings to finance a bailout. Analysts worry the move could roil international markets and jeopardize Europe’s fragile economies. Officials in Spain and Italy tried over the weekend to reassure their citizens by saying the situation in Cyprus is unique, and that bank deposits in their countries will remain safe.
In Cyprus, the levy is expected to raise €5.8 billion ($7.5 billion) to recapitalize the nation’s banks and service the country’s debt. Cypriot banks got into trouble after losing some 4.5 billion ($5.8 billion) on their Greek government bond holdings after Greece imposed 74 percent losses on investors to write down its staggering $460 billion debt. Angry Cypriots said they don’t want to pay for their banks mistakes.
Anastasiades didn’t provide any specifics on what he would do to try to limit the pain on small depositors, but he explained why he decided to consent to the taxes that he said during his campaign he would oppose. “The solution that we have reached is certainly not the one we wanted, but it is the least painful under the circumstances because above all it leaves the management of our economy in our own hands,” Anastasiades said in his address.
He said the tax would only be as much as the interest collected on deposits over two years and stressed that it would only happen once because it would ensure the bailout wouldn’t push the country’s debt to unsustainable levels.
Anastasiades said savers would be compensated with bank shares. Moreover, all those depositors who opt to keep their money in Cypriot banks for at least two years would receive government bonds with a value equal to their losses. The bonds will be backed up by future revenue generated from the country’s newfound offshore gas deposits.
He said pension and provident funds will remain untouched, and there won’t be any need for further salary and pension cuts, or an earlier demand by creditors for a financial transaction tax, which would have damaged Cyprus’ financial services-driven economy. Cypriot lawmakers have already approved cuts to government worker salaries and pensions as well as tax increases under a preliminary bailout deal.
The Cypriot President said if he hadn’t accepted the tax on bank deposits, the European Central Bank would have stopped providing emergency funds to the country’s top two lenders which would have led to the collapse of the banking system, the bankruptcy of thousands of small businesses, massive job losses, and ultimately the country’s exit from the euro. He also said earlier that he would offer to give Cypriots bonds on gas reserves that are being explored off the country’s coast.
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