Cypriot President Nicos Anastasiades said yesterday (17 March) he had no choice but to accept a painful tax on the country’s bank deposits in return for international aid, saying the alternative was bankruptcy.
The entire island of Cyprus is officially EU territory, but the country is divided. Turkey, an EU candidate, doesn’t recognise the Republic of Cyprus and has occupied the northern part of the island since 1974.
Cyprus is heavily exposed to the Greek crisis and needs to salvage its banking system, which in recent years has become a haven for rich Russians.
Eight months of inconclusive talks on a bailout package
have turned tiny Cyprus into a big headache for the eurozone, triggering fears of a financial collapse that reignites the bloc's debt crisis.
Nicos Anastasiades, who won a resounding victory in the February elections, promised to “restore the credibility of Cyprus”. He faces weeks of difficult talks with foreign lenders on a financial rescue for the nation.
In a nationally televised address, the president called it the least painful option under the circumstances before going on to accuse eurozone finance ministers of forcing Cyprus into this deal, Euronews reported.
Breaking with previous EU practice that depositors' savings are sacrosanct, Cyprus and international lenders agreed at the weekend that savers in the island's outsized banking system would take a hit in return for the offer of €10 billion in aid.
The decision to introduce levies on deposits are 9.9% for those exceeding €100,000 and 6.7% on anything below that, according to the bailout agreement, announced on Saturday morning.
The news stunned Cypriots and caused a run on bank machines, most of which were depleted within hours. Electronic transfers were halted.
Outside Cyprus, the move unnerved depositors in the eurozone's weaker economies and investors fearing a precedent that could reignite market turmoil.
Anastasiades promised those savers they would be compensated by being given shares in banks guaranteed by future natural gas revenues.
Cyprus is expecting the results of an offshore appraisal drilling this year to confirm the island is sitting on vast amounts of natural gas worth billions.
Softening the blow?
The Cypriot government was working on a proposal to soften the blow of a bank deposit levy on smaller savers ahead of a parliamentary vote on Monday (18 March) on the measure central to a eurozone bailout designed to avert bankruptcy.
Anastasiades’s centre-right Democratic Rally party, with 20 seats in the 56-member parliament, needs the support of other factions for the vote to pass. It was unclear whether even his coalition partners, the Democratic party, would fully support the levy.
Approval of the deposit cut is far from a given. No party has an absolute majority, three parties say outright they will not back the tax, and a vote initially planned for Sunday was rescheduled to allow more time to build a consensus.
Faced with a growing public backlash, Cypriot finance ministry officials began discussions with lenders on Sunday to lessen the blow for smaller savers.
In Brussels, a spokesman for Olli Rehn, the European commissioner in charge of economic affairs, said changes to the amounts paid by different depositors could be acceptable given that the financial impact would be the same.
"Essentially parliament is called to legalise a decision to rob depositors blind, against every written and unwritten law," said Yiannakis Omirou, speaker of parliament and head of EDEK, the small Socialist party. "We refuse to subscribe to this."
Even though there was no immediate sign of savers taking fright in other parts of Europe badly hurt by the regional debt crisis, some feared a precedent had been set.
Independent financial experts and governmental sources believe that the Eurogroup and the European Central Bank need a flawless execution of the bailout agreement, because the deal will likely serve as blueprint for future bailouts. Most likely recipients of such bailout packages are the so-called PIGS countries: Portugal, Italy, Greece and Spain.
Russians lose money
Foreigners hold some 40% of the €68 billion sitting in Cypriot banks, and most of that belongs to Russians, who for decades have favoured the island as a place to stash their money.
Forbes said on its website that ratings agency Moody's last year estimated the holdings of Russian businesses in Cyprus at $19 billion, with another $12 billion held there by Russian banks.
Forbes also cites other press estimates which place the personal deposits of Russians in Cyprus between 8 and 35 billion euros.
“Confidence in Cyprus as a safe place to deposit money is going to be reduced to zero,” Anatoly Aksakov of the Russian association of regional banks was quoted as saying by Interfax news agency and the Greek daily Kathimerini.
Sharon Bowles, chair of the European Parliament’s Economic and Monetary Affairs Committee, said she was appalled by the Cyprus bailout which includes ‘bailing-in’ some guaranteed deposits – i.e. swapping them for shares. “This grabbing of ordinary depositors' money is billed as a tax, so as to try and circumvent the EU’s deposit guarantee laws. It robs smaller investors of the protection they were promised. If this were a bank they would be in court for mis-selling!,” she said. “The lesson here is that the EU’s single market rules will be flouted when the eurozone, ECB and IMF say so. At a time when many are greatly concerned that the creation of the ‘Banking Union’, giving the ECB unprecedented power, will demote the priorities of the single market, we see it here in action. “Deposit guarantees were brought in at a maximum harmonising level so that citizens across the EU would not have incentives to move funds from country to country. That has now been blown apart. What else will be blown apart when convenient - the capital requirements we have been slaved over the new recovery and resolution rules? What does this mean for confidence in cross-border banking and resolution and preventing the fragmentation of the baking sector? “When the dust has settled on this deal, which I hope it never does, we will see that the single market has been sold down the river for a shoddy price. All the worse as the consequences on Cyprus of the Greek bond haircuts were obvious.”