Valdosta Daily Times

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March 18, 2013

Cyprus president tries to amend bailout plan

NICOSIA, Cyprus — Cyprus’ president said Sunday that he is trying to amend an unpopular euro zone bailout plan that would tax deposits in the country’s banks to reduce its effect on small savers.

But in a nationally televised speech, President Nicos Anastasiades also urged lawmakers to approve the tax in a vote Monday, 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.

Monday is a national holiday in Cyprus.

“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.”

In exchange for (euro) 10 billion ($13 billion) in rescue money, creditors would impose a one-time tax of 6.75 percent on all bank deposits under (euro) 100,000 ($131,000) and 9.9 percent over that amount.  The decision Saturday prompted anxious depositors to rush to ATM machines to withdraw as much of their money as they could.

Anastasiades did not say what he meant by “small depositors,” but they would certainly fall among those with less than (euro) 100,000 in the bank.

The deposit tax is part of a bailout agreement reached early Saturday after talks by finance ministers from euro countries and representatives of the International Monetary Fund and the European Central Bank.

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 — which also would hit wealthy Russian depositors who have put vast sums into Cyprus’s banks in recent years — is expected to raise (euro) 5.8 billion to recapitalize the nation’s banks and service the country’s debt.

Cypriot banks got into trouble after losing some (euro) 4.5 billion on their Greek government bond holdings after eurozone leaders decided to write down Greece’s debt last year.

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. Anastasiades, who only assumed the Cypriot presidency on March 1st, had vehemently rejected any idea of going after deposits to help pay for a bailout during the campaign and after his election.

“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 Sunday.

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 a raft of 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.

 

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