Cyprus MPs reject EU-IMF bailout tax on bank depositors

 

The BBC's Gavin Hewitt says there has been a people's revolt

Cyprus' parliament has rejected a controversial levy on bank deposits, proposed as part of an EU-IMF 10bn-euro (£8.7bn; $13bn) bailout package.

No MPs voted for the bill, with 36 voting against and 19 abstaining.

The finance ministry had modified the package, proposing an exemption for savers with smaller deposits, but opposition had remained fierce.

Thousands of protesters who had filled the streets outside parliament reacted with joy to the news of the vote.

EU finance ministers had previously warned that Cyprus' two biggest banks would collapse if the deal failed to go through in some form.

But after the vote the European Central Bank (ECB) moved quickly to announce it would continue to provide support for struggling Cypriot banks "as needed within the existing rules".

German Finance Minister Wolfgang Schauble said he "regretted" the vote and that Cypriots must understand ECB aid was contingent on a reform programme.

"There's a danger that they won't be able to open the banks again at all," he said. "Two big Cypriot banks are insolvent if there are no emergency funds from the European Central Bank."

The bailout deal, announced after 10 hours of talks on Saturday, prompted widespread outrage on the island at the prospect of ordinary savers being forced to pay a levy of 6.75%

The Cypriot finance ministry announced a change in the plan on Tuesday morning, to exempt savers with less than 20,000 euros (£17,000), while those over 100,000 euros would still be charged at 9.9%. However, this was not enough to placate critics.

Levy basics

  • Depositors with 20,000 - 100,000 euros deposited must pay 6.75%
  • Those with more than 100,000 in their accounts must pay 9.9%
  • Depositors will be compensated with the equivalent amount in shares in their banks
  • The levy is a one-off measure
  • Eurozone wants Cyprus to get 5.8bn euros from deposits, in exchange for a 10bn-euro EU/IMF loan
  • Total of about 68bn euros on deposit in Cypriot banks, foreigners hold about 40% - most of them Russians

The plan to tax bigger deposits at a higher rate has angered Russia, as Russian nationals hold many of those larger deposits.

Meanwhile, the UK ministry of defence said a plane carrying 1m euros had arrived in Cyprus as a contingency measure to provide military personnel and their families with emergency loans.

The money is to be used for British personnel and their families if cash machines and debit cards stop working.

'Against the interests of Cyprus'

Several MPs during the parliament debate on Tuesday evening denounced the proposed plan as "blackmail" and not a single lawmaker backed the deal.

The BBC's Mark Lowen in Nicosia said the vote had left the bailout in turmoil, sending a clear message to Brussels that the strategy needed a drastic rethink.

President Nicos Anastasiades had urged all parties to back the bailout, saying Cyprus would be bankrupt if the deal did not go ahead. However, he was aware that they were likely to reject the levy, regardless of the modifications.

"They feel and they think it's unjust and that it is against the interests of Cyprus at large. But I have to admit that it was something which was not expected by the troika and by our friends, the Eurogroup."

He has called an emergency meeting of political party leaders on Wednesday morning to discuss the way forward.

The president of the Eurogroup of eurozone finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, said he "took note" of the parliament's decision and that the Eurogroup stood "ready to assist Cyprus in its reform efforts".

Mr Dijsselbloem had earlier emphasised that no other eurozone country would be forced to impose such a levy.

The Cyprus central bank chief, Panicos Demetriades, warned that scrapping the tax on small savers would scupper the plan to raise 5.8bn euros in total from bank deposits. He also predicted account holders could suddenly withdraw 10% or more of the total in Cypriot banks if the levy was imposed.

Opposition MP Pambos Papageorgiou says any tax on savers will be rejected by parliament

Fearing a run on accounts, Cyprus has shut its banks until at least Thursday. The local stock exchange also remains closed.

Cyprus' banks were badly exposed to Greece, which has itself been the recipient of two huge bailouts.

Russian anger

Mr Demetriades said that he favoured imposing the levy only on deposits larger than 100,000 euros, with eurozone finance ministers also suggesting such a move.

Instead, they argue that wealthier savers should pay the levy at a higher rate - losing more than 15% of their investments, correspondents say.

Start Quote

It would help if the European authorities could explain more clearly why this will not set a precedent for the future”

End Quote

Of the estimated 68bn euros in total held in Cypriot bank accounts about 40% belongs to foreigners - most of them thought to be Russians.

The government fears a higher levy on these larger deposits would prompt many large investors to withdraw from the island and would effectively destroy its financial sector.

Russia has also said it may reconsider the terms of a 2.5bn-euro loan it made to Cyprus in 2011, which was separate from the proposed eurozone bailout.

Cypriot Finance Minister Michalis Sarris arrived in Moscow on Tuesday to see if the repayment on that loan could be delayed until 2020, and whether the interest rate could be reduced. As his visit began, he denied rumours that he had submitted his resignation.

Officials said he would also be looking for "further investment" in his country, correspondents report, with some speculating this might mean Russian access to Cyprus' large undeveloped gas deposits.

 

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  • rate this
    +3

    Comment number 104.

    I wouldn't be too complacent, it's not impossible that something similar could occur here. Gordon claimed money from dormant accounts not so long ago and it's feasible that the compensation scheme could be 'avoided' much like the lesson from Cypress.

  • rate this
    +5

    Comment number 103.

    Yep, let's pick an amount, say 20,000 euros, that will appease the majority and make it look like we care about the little people.

    Sad thing is, that might be just enough.

  • rate this
    +165

    Comment number 102.

    I simply don't understand why savers, and not bondholders and lenders to banks, are being targeted! The moral hazard is this: the average Cypriot on the street can't evaluate bank risks and needs help and protection. Professional bondholders and lenders can, and don't need. The responsibility and therefore the risk is theirs, not savers. Why is Cyprus turning this principle on its head?!

  • rate this
    +3

    Comment number 101.

    I suspect the Russians may threaten to shut down the gas pipeline to Germany unless there is a policy change.

  • rate this
    +6

    Comment number 100.

    The Cypriot banks shouldn't have been quite so eager to accept Russian Mafia money without question. But what a crazy concept, basing a nations entire economy upon the chimeric notion of money actually being real and a goal in itself. I wonder, was this mad idea adopted elsewhere in the world? (This is irony for those that don't know how to recognise it)

  • rate this
    +43

    Comment number 99.

    While I'm not supporting this at all, I find it interesting that all those people that previously supported a wealth tax (eg mansion tax), are now against it when it applies to people like themselves.

  • rate this
    +5

    Comment number 98.

    @farkyss you got it so right. Every fiat currency is gradually becoming worthless or will just simply be confiscated - everyone should buy gold and silver as a store of wealth for their savings.

    One things for sure though, I'm really hope the next impromptu UK bank holiday isn't for the same reasons as Cyprus!!

  • rate this
    -2

    Comment number 97.

    The only cure that will work is to lower all existing loan rates below those of the average and pay for it with the bailout money. In this way you put more money per month into the hands of those who are likely to spend it in places where the multiplier is higher, especially in a local sense. Punishment and revenge for perceived crimes or injustices can be taken care of down the road. First fix it

  • rate this
    +4

    Comment number 96.

    It is a marker of the pygmy sized intelligence of these Cypriot politicians that they seem to have entirely missed the EU rule that 'small deposits' of under 100,000 euros are supposed to be protected. To suggest that it is OK to 'tax' sums over that because the money is owned by Russian nationals is beyond belief.
    When other Med countries realise this they will empty their bank accounts. DOOM!

  • rate this
    +2

    Comment number 95.

    Why not to ask DSK (Dominique Strauss-Kahn) for a comment for this matter? I would like to see it here on the BBC - I guess that he can say something worthy of reading about it (being French, formed IMF boss, and now free in the wilderness). Please, BBC, ask him for a comment.

  • rate this
    +2

    Comment number 94.

    Meanwhile bankers everywhere in the EU are getting their million bonuses...
    Seems the trend nowadays is "work a little, earn a little and now save a little"...and you may be left alone!

  • rate this
    0

    Comment number 93.

    68. pabe52
    "Merkel has a lot to answer for."
    What has Merkep to do with the cause of Cyprus's problems, this is just racist anti-German nonsense. Cyprus set itself up as a tax haven, the US caused the original financial crisis and why should other EU taxpayers pay for tax-free , high interest rates and all the low taxes in Cyprus? German taxpayers or elsewhere have lower rates and higer taxes

  • rate this
    -1

    Comment number 92.

    The money is lost and just like Iceland the banking sector is to large for the country to prop up. So Friday one of two things can happen, Banks open and acount holders have 90% of cash they had last friday or banks stay closed, go into anministration country goes down with it leave EU anf IMF running their economy for next 10 years...
    Is it a difficult choice?

  • rate this
    +10

    Comment number 91.

    It doesn't matter what the rate is, by whatever name you call it, it is still theft on money that has, for most people, already paid tax on! It is criminal and there is no other word for it!

  • rate this
    +35

    Comment number 90.

    69.
    Bob
    1 Minute ago
    @ 69. Bob
    #29. Frank do you really think that the English Government would allow its citizens to rise up.... The Police and the Army would be mobilised with shoot to kill orders.

    By rise up, I'm referring to peaceful protest / national strike across all sectors, millions on the street to show our rejection of a policy of utter theft as is being proposed in Cyprus.

  • rate this
    +1

    Comment number 89.

    8.HotPepperMan

    "...The action is a clear indicator to anyone with a bank account that the banks and the government cannot be trusted..."

    ===

    I take it by "the" government you mean that of Cyprus, for it was that which imposed the levy?

    Or are you expecting to be massacred too, because Cambodia's goverment under Pol Pot did this, and we have a thing called a "government" as well?

  • rate this
    +6

    Comment number 88.

    I must remember the next time I open a savings account (highly unlikely now) to read the T & C's...
    "In the event the Bank finds itself in financial hardship, we shall be entitled to a percentage of your hard earned money. You will then be entitled to the equivalent in shares in our failing company, which will be worthless for some time".

  • rate this
    +6

    Comment number 87.

    Looks bad for Cyprus, unfortunately I can't see any kind of soft landing for them, will probably result in years of hardship. On the other hand we could see another cold war of sorts between the EU and Russia. Russia clearly doesn't have the muscle that it once had, but at the same time do the EU with their constantly jittery economic position really want to antagonise an energy giant

  • rate this
    -4

    Comment number 86.

    Tax Heaven to Tax Hell nice and quickly!

    Maybe they shold have paid their tax in the first place!

  • rate this
    +5

    Comment number 85.

    Without a currency to devalue the EU needs to raid savers accounts. Not going to be putting any money with Santander any time soon.

 

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