Cypriot ministers yesterday were trying to revise a plan to seize money from bank deposits before a parliamentary vote today that will either secure the island’s financial rescue or lead to its default, with reverberations across the eurozone.
The weekend announcement that Cyprus would impose a tax on bank accounts as part of a 10 billion euros (US$13 billion) bailout by the EU broke with previous practice that depositors’ savings were sacrosanct. The euro and stock markets fell on concern that the eurozone crisis was returning.
Before the vote, which is too close to call, the Cypriot government was working to soften the blow to smaller savers by tilting more of the tax toward those with deposits greater than 100,000 euros. Many of these depositors are Russians and the planned levy has already elicited an angry reaction from Russian President Vladimir Putin.
The government says Cyprus has no choice but to accept the bailout with the tax on deposits, or go bankrupt.
A Cypriot source said the introduction of a tax-free threshold for smaller bank deposits — maybe up to 20,000 euros — was under discussion, but not yet agreed.
The parliamentary speaker said debate on the bank levy would be delayed until 4pm GMT today, suggesting banks, shut yesterday for a bank holiday, will remain closed today.
The eurozone has indicated that changes would be acceptable as long as the return of about 6 billion euros is maintained. If the Cypriot parliament votes the deal down, the eurozone risks being dragged back into crisis.
“It is up to the government alone to decide if it wants to change the structure of the ... contribution [from] the banking sector,” European Central Bank policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, told reporters on the sidelines of a conference in Berlin, Germany.
“The important thing is that the financial contribution of 5.8 billion euros remains,” he said.
Cypriots emptied cash machines to get their funds. The move also unnerved depositors in the eurozone’s weaker economies. Investors feared a precedent that could reignite market turmoil that the European Central Bank has calmed in recent months with its pledge to do whatever it takes to save the euro.
The euro fell before tempering losses. European stocks did similarly, dropping 2 percent before more than halving losses. In the bond market, safe haven German Bund futures shot up, while Italian equivalents dived, suggesting some concern that Cyprus could infect its larger neighbors.
“The most important question is what would happen the following day if the bill isn’t voted,” Central Bank of Cyprus Governor Panicos Demetriades told parliament.
“What would certainly happen is that our two big banks would need to be consolidated. This doesn’t mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way,” he said.
US economist Paul Krugman wrote in the New York Times: “It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘Time to stage a run on your banks!’”
Cyprus’ banking sector dwarfs the size of its economy and its banks have been severely hurt by exposure to much larger neighbor Greece.
Its open economy has meant its banks also attract cash from Russians. Moscow is considering extending an existing 2.5 billion euros loan to help bail the island out and said that it not being consulted about the bailout would come into play.
“It turns out that the eurozone actions ... took place without discussions with Russia, so we will consider the issue of restructuring the [Cyprus] loan taking into account our participation in the joint actions with the European Union,” Russian Finance Minister Anton Siluanov said.
Putin criticized the bank levy as unfair and setting a dangerous precedent.
“Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous,” Kremlin spokesman Dmitry Peskov told reporters.