Officials grilled over Cyprus bailout fiasco

Van Rompuy bailout Cyprus.JPG

Leading MEPs confronted European Council President Herman Van Rompuy and Commission Vice President Maroš Šef?ovi? yesterday (20 March), threatening to initiate a Parliamentary inquiry into the failed Cyprus bailout.

The bank levy proposed by eurozone finance ministers last weekend as part of a €10-billion bailout for Cyprus came under heavy fire by political group leaders in the European Parliament.

The special Conference of Presidents was held to debate the outcome of last week's EU summit.

Hannes Swoboda, the Socialists and Democrats (S&D) leader, described the Cyprus bailout situation "unacceptable" and branded the finance ministers’ proposal as "a scandal".

As part of the €10-billion package for Cyprus, finance ministers proposed a one-off tax on bank deposits. The deal was rejected by the Cypriot Parliament on Tuesday (19 March), leaving Cyprus on the brink of financial meltdown.

Critics have expressed concerns about the tax, which proposed to introduce 9.9% levies on deposits exceeding €100,000 while lower deposits would be taxed 6.7%.

The failed bailout plan would have allowed for European governments to directly intervene in personal Cypriot holdings, an unprecedented tax intrusion in recent banking history.

'What happened?'

MEPs voiced strong disapproval about the proposed bank levies, which were expected to hit small savers instead of the large depositors, banks and shareholders it initially sought to target.

“Cyprus is our failure of the euro-policy," said Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe (ALDE). "If we ask for €5 billion, we need to protect depositors, not the banks and shareholders.”

Verhofstadt asked Van Rompuy and Šef?ovi?: “What happened last Saturday?”

“A banking union must protect the bank customers, especially the ordinary depositors rather than the bond holder and creditors. It is totally incomprehensible and undermines the credibility and legitimacy of the EU and its new financial structures to restore stability,” Verhofstadt said.

Had the bailout deal been accepted by the Cypriot Parliament, it would have hit ordinary bank customers rather than taxing large investors with funds exceeding €100,000.

Russian role

Among the alternatives for the island is an EU bailout with IMF support and possible assistance from Russia, whose wealthiest citizens have used Cyprus as a financial safe heaven.

Cypriot Finance Minister Michael Sarris extended a stay in Moscow, where Russian officials said he asked for a further €5 billion on top of a five-year extension and lower interest on an existing €2.5 billion loan from Russia.

Speakers at the parliamentary meeting also expressed their opinions about Russian involvement in the Cypriot bailout, citing the need for a united European voice.

“With regards to EU-Russian relations, we must act coherently. The more we speak with one voice the more serious we are,” said Von Rompuy.

Swoboda, meanwhile, warned about the dangers of involving Russia as part of a bailout solution without searching for alternatives.

“Russia should not be seen as the great saviour, we have other alternatives like the financial transaction tax and mortgage tax, all of which could help towards the bailout,” he said.

Positions

Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Euorpe (ALDE), voiced concerns about the proposed bailout, referring to it as an unfair tool, which does not favor customers and small depositors, while instead helping bankers and large investors. He also called for an inquiry into the negotiations, which took place between Eurozone finance ministers and the Cypriot authorities last week (March 15-16).

“A banking union must protect the bank customers, especially the ordinary depositors rather than the bond holders and creditors. Nor does the decision do anything to break the link between banks and sovereigns,” he said.

Hannes Swoboda, president of the Socialist & Democrats (S&D) Group, said: "We have seen a disappointing misjudgment on the part of eurozone finance ministers who proposed introducing a special levy on savings. But the real failure lies with the Cypriot president and government, who came up with an unfair scheme where those who bear no responsibility for Cyprus' problems would have been hurt the hardest.”

Corien Wortmann-Kool, vice chairwoman of the centre-right European People's Party (EPP), said: "The situation in Cyprus is critical, but it was not created over the past two weeks. President Anastasiades inherited a very deep crisis. My question is: how come all of a sudden small savings and depositors are no longer protected? This is a dangerous precedent. It takes years to recover trust by depositors. Why hit the small savers? The crisis in Cyprus has sounded an alarm bell. We have to speed up the regulation of financial markets. Above all, we need a European solution to the Cyprus problem, not a Russian one."

Daniel Cohn-Bendit, co-president of the Greens, said: "The attack on ordinary depositors in the context of Cyprus' bail-out is outrageous and must be urgently corrected.

"Small depositors should be last in the line of fire in any bank restructuring. This is the guiding logic behind EU legislation providing for national deposit guarantee schemes, as well as draft legislation currently under consideration on an EU deposit guarantee scheme. While the proposed depositors' levy may be legally consistent with the existing legislation, it is a cynical ploy, which totally defies the spirit of the rules and their raison d'être."

Background

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”.

Timeline

  • 25-31 March: Cypriot government expected to finalise bailout plan
  • 21 March: Parliament's Economic and Monetary Affairs Committee meets with the new Eurogroup President Jeroen Dijsselbloem

Further Reading

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