Cyprus’ parliament postponed an emergency session called to approve a levy on bank deposits yesterday after signs lawmakers could block the surprise move agreed in Brussels to help fund a bailout and avert national bankruptcy.
In a radical departure from previous aid packages, eurozone finance ministers want Cyprus depositors to forfeit up to 9.9 percent of their deposits in return for a 10 billion euro bailout to the island, financially crippled by its exposure to neighboring Greece.
The decision, announced on Saturday morning, stunned Cypriots and caused a run on cashpoints, most of which were depleted within hours. Electronic transfers were stopped.
The move to take a percentage of deposits, which could raise almost 6 billion euros, must be ratified by parliament, where no party has a majority. If it fails to do so, Cypriot President Nicos Anastasiades has warned, Cyprus’ two largest banks will collapse.
One bank, the Cyprus Popular Bank, could have its emergency liquidity assistance funding from the European Central Bank cut by Thursday.
A default in Cyprus would threaten to unravel investor confidence in the eurozone that has been fostered by the European Central Bank’s promise last year to do whatever it takes to shore up the currency bloc. A meeting of parliament scheduled for yesterday was postponed a day to give more time for consultations and to broker a deal, political sources said. The levy is scheduled to come into force tomorrow, after a bank holiday today.
The levy plan broke a taboo in Europe to leave bank deposits untouched, but eurozone officials said it was the only way to salvage the financial sector, which is about eight times the size of the economy.
European officials said it would not set a precedent.
In Spain, one of four other states getting eurozone help and seen as a possible candidate for a sovereign rescue, officials were quick to say that Cyprus was a unique case. A Bank of Spain spokesman said there had been no sign of deposit flight.
The crisis is unprecedented in the history of the Mediterranean island, which suffered a war and ethnic split in 1974.
Anastasiades, elected only three weeks ago, said he had no choice but to accept the eurozone’s aid terms.
“We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful, but controlled management of the crisis,” Anastasiades said in a statement.
With a GDP of barely 0.2 percent of the bloc’s overall output, Cyprus applied for financial aid in June last year, but negotiations were stalled by the complexity of the deal and the reluctance of the island’s previous president to sign.
IMF Managing Director Christine Lagarde, who attended the meeting, said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.
The proposed levies on deposits are 9.9 percent for those exceeding 100,000 euros and 6.7 percent on anything below that.
Those affected will include rich Russians with deposits in Cyprus and Europeans who have retired to the island, as well as Cypriots themselves.