Cyprus was expected to make a dramatic U-turn yesterday to avert the imminent threat of financial meltdown, having signaled it is willing to tax big savers in its stricken banks to clinch a bailout from the EU.
The island’s partners in the 17-nation eurozone have scheduled a meeting for today in Brussels, in a strong sign they believe a solution is near.
As hundreds of demonstrators faced off with riot police outside the Cyprus parliament late into Friday night, lawmakers inside voted to nationalize pension funds, pool state assets for a bond issue and peel good assets from bad in stricken banks.
Officials said a deal was imminent to raise 5.8 billion euros (US$7.5 billion) demanded by the EU in return for a 10 billion euro lifeline, including some kind of levy on bank deposits, which could have been voted on by yesterday.
Without a deal by tomorrow, the European Central Bank has threatened to cut off cash for Cypriot banks, spelling certain collapse and possible ejection from the euro.
Cyprus moved perilously close to bankruptcy when its parliament threw out the proposed levy on Tuesday, with Cypriots enraged by plans to hit small holdings of ordinary savers as well as large accounts, many held by foreign investors.
In the absence of the bank levy, Nicosia turned to Russia, whose citizens have billions of euros at stake in Cyprus’s outsized banking sector. However, Cyprus’ Minister of Finance Michael Sarris returned from Moscow empty-handed. On Friday he said the bank levy was back “on the table.”
Party officials told reporters that discussions were centered on a levy on depositors holding over 100,000 euros, sparing smaller savers. One official said the tax could be limited to big savers at the island’s biggest lender, Bank of Cyprus, at a 20 percent rate.
Lawmakers adopted a bill that would pave the way for the government to split its failing lenders into good and bad banks. The measure is likely to target Bank of Cyprus and No. 2 lender Cyprus Popular Bank, also known as Laiki, and would make it easier for the government to safeguard deposits that enjoy a state guarantee of up to 100,000 euros.
“With the process of consolidation, the depositors over 100,000 euros will wait for several years to see how much of their deposits they will collect,” said Averof Neophytou, deputy leader of the ruling Democratic Rally party.
“At the same time, this political decision to support this harsh law safeguards 100 percent of the deposits of 361,000 depositors in Laiki Bank,” he added, referring to depositors with up to 100,000 euros.
In Finland, an ally of Germany in disciplining eurozone partners, Finnish Minister of European Affairs Alexander Stubb told reporters he was confident Cyprus would accept EU rescue terms “because there are no other options.”
The pace of the unfolding drama has stunned Cypriots, who barely a month ago elected conservative President Nicos Anastasiades on a mandate to secure a bailout.
The EU says the only way to find the 5.8 billion euros Cyprus needs to contribute to the bailout of its banks is from the depositors who put money in them.
The tottering banks hold 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros — enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own. Much of the banks’ capital was wiped out by investments in Greece.