Cyprus deal on brink of collapse

Cyprus deal on brink of collapse

2013-03-19 14:46

Nicosa - Cyprus on Tuesday dropped a controversial levy on bank savings below €20 000, sparking a warning by the central bank governor that the crucial eurozone bailout deal was now in danger of collapse.

Panicos Demetriades's warning came as International Monetary Fund chief Christine Lagarde urged Cyprus to meet its commitments under the €10bn ($13bn) deal sealed with eurozone partners at the weekend.

The revised plan, drafted in response to an angry backlash at home and jitters that roiled global markets, sees a one-time levy being dropped on bank savings below €20 000 but retained at 6.75% on deposits of €20 000 to €100 000 and at 9.9% for amounts above €100 000.

Given the amendments to the bill, the tax which was originally to have applied to all bank deposits "will not yield the estimated €5.8bn agreed by the Eurogroup", Demetriades told parliament's finance committee.

"If we secure €5.5bn it will be considered in breach of the agreement and perhaps will not be accepted," he said, as cited by the Cyprus News Agency.

The bill was to be voted on later on Tuesday by parliament, whose stamp of approval is crucial for the bailout deal to go ahead.

President Nicos Anastasiades has called on all parties to back the bailout, warning that the island faces bankruptcy if it is rejected.

Fearing a run on accounts, Cyprus has shut its banks until at least Thursday, with the local stock exchange closed for the same period.

The planned levy on bank savings was agreed during the negotiations for the sovereign bailout deal for Cyprus.

Under the original accord, Cyprus agreed to impose a levy of 6.75% on bank accounts up to €100 000 and 9.9% for larger deposits. The move was aimed at raising €5.8bn for the government.

But faced with a public backlash that spooked global markets, eurozone finance ministers told Cyprus on Monday to take another look at the proposal.

Eurogroup President Jeroen Dijsselbloem of The Netherlands said ministers "continue to be of the view that small depositors should be treated differently from large depositors".

The Eurozone finance ministers said there would be re-negotiations to "introduce more progressivity in the one-off levy", in other words increasing the tax rate on bigger holdings to ensure the same €5.8bn return.

However, the Cypriot authorities, wary of seeing a flight of capital from the debt-hit Mediterranean island, opted to leave the maximum tax at 9.9%, according to an amended tax bill seen by AFP.

Lagarde, speaking in Frankfurt before the revised bill was made public, said the IMF was "extremely supportive of the Cypriot authorities' intentions to introduce more progressive rates" on taxing bank deposits.

She said it was now up to Cyprus to make good its commitments.

"It's time to deliver," Lagarde told a financial congress.

Adding to the pressure on the newly-elected Cyprus leaders, a German government spokesperson said on Tuesday that chancellor Angela Merkel had called Anastasiades to stress that his country should hold talks only with international creditors on its bailout deal.

"The chancellor once again emphasised that the negotiations are to be conducted only with the troika," the spokesperson told AFP, referring to the term used for the European Union, the European Central Bank and the International Monetary Fund.

The comment was made as the Cypriot Finance Minister Michalis Sarris headed to Moscow after an explosion of anger in Russia at the EU bailout deal for the island that could see Russian investors lose billions of euros.

Moscow, which has an outstanding €2.5bn loan to Cyprus and billions more in deposits in the island's banks, reacted angrily to the EU levy.

Russian President Vladimir Putin slammed the "dangerous" move and turmoil hit stock and currency trades on Monday amid concerns that a precedent had been set for bigger debt-saddled eurozone economies such as Italy and Spain.

Estimates vary but the Moody's rating firm estimates that Russian companies and banks keep up to $31bn in Cyprus, which accounts for between a third and half of all Cypriot deposits.

After markets suffered losses on Monday, Asian bourses rebounded on Tuesday as news spread that Cyprus was reworking the controversial savings levy.

Tokyo stocks led the way, closing 2.03% higher. However, Hong Kong suffered a late sell-off to end 0.19% lower.

The euro also rebounded in Asia, fetching $1 2961, up from $1 2957 in New York on Monday.

  • tilovonbrandis - 2013-03-19 15:47

    The BIS (Bank of international Settlements) is checking out what would happen if you raid peoples savings. This bank is a cabal of people that run the reserve banks (private) banks in each country. What they do is lend money to governments by entering some numbers into computers. These governments then pay back that debt in real money with interest. If the governments cannot pay back, they put the citizens under pressure to pay back. In this case they are robbing the saving accounts from account holders in Cyprus. If it works and they get away with it, they will do it to all the account holder in the Euro zone. (Oh, the also make sure that every country is running on debt!!!)

  • freddy.vanwijk - 2013-03-19 15:54

    It does not matter really how big depositors are. Governments in general do not OWN THAT MONEY!! To introduce levy is a theft (sin) that depositors will not forgive. The run on banks will continue as depositors consider governments to be a serious threat to their existence.

      Johan Pretorius - 2013-03-19 16:46

      This has nothing to do with theft. It is time people realise there is no such thing as a 100% guarantee when it comes to business. Depositing your money in a bank account is just another contractual arrangement between you and another legal entity (the bank) whereby you give it the use of your funds and in return you receive interest. If they happen to use your money to make bad loans/investments and lose it, then you don’t get everything back, obviously depending on the level of capital that the bank has which covers the 1st portion of the losses. This is the same principle as any other corporate or investment fund. Yes there are laws and regulations adopted by various countries to try and push banks in making “safe” loans/investments but again, “safe” is not a 100% guarantee. At the end of the day, you still take “RISK” and are rewarded with interest. The alternative is to leave your money under your mattress but then you run the risk of it being worth less tomorrow due to inflation.

      tilovonbrandis - 2013-03-19 17:36

      @Johan, what you wrote is correct according to the conventional school of economics as taught by big companies and big banks, except the rules that apply to you (as you outlined in your comment) don't apply to the big international banks, federal reserves and multinational corporations. Fortunately a lot of information has become available on the internet which clearly shows that this is one big ruse propagated by a cabal of bankers with the aim to make us willing debt slaves in their pyramid debt scheme. If you are interested, I recommend some research as it is important that more and more people become aware of how we all are manipulated to make the rich richer. It is astonishing what you will find, if you go off the beaten track (i.e. outside of the propaganda that has been disseminated for centuries by corporate media).

      Dot Svornak - 2013-03-19 21:14

      JohanPretorius, At the end of the day it is still theft,bet these big wig bankers are all enjoying at least 3 good meals a day,not so many of the islanders. It is these same bankers ho f***ed up,let them dip their hands in their pockets.The Cypriots have already had their pensions reduced by up to 30% how much more must they endure.Soup kitchens have sprung up all over the island to ensure that at least the children have one decent meal a day.Tax the rich companies manufacturing medicines,etc,but leave the middle clss aloned.

      Johan Pretorius - 2013-03-20 12:43

      @ Tilo . If the conventional economics you refer to relate to the simple principles of a correlation between supply/demand and price as well as risk and reward, then you are incorrect in saying that this is taught by big corporates and banks. If anything they disclose as little as possible in this regard to their clients in order to profit from lack of knowledge. What they do disclose is only done because some regulation forces them to do so. My post was an attempt to get people to realise that a bank deposit is not a risk free investment as people generally tend to believe. This apprehensiveness of the general public to educate themselves and take responsibility for their decisions as well as their tendency to hide behind their “ignorance” has caused a lot of problems for them in the past, and will continue to do so for many years to come. At the end of the day, Cypress as a country has too much debt. It is debatable as to who benefited from those funds in the past, but bottom line is, the debt will have to be settled one way or another. This will either be the citizens or the external investors representing the citizens of other countries. Maths remains maths and the problem cannot be wished away.

  • Tim Norris - 2013-03-19 17:24

    Well since it is the banks that lost all the money, let them loan the money to the government, but not by taking it away from depositors. Before they try to do this, the deposits will be removed, of course, and there will be a run on the banks, so they will just go bust anyway. Do an Iceland, go bust and then you have taken the first real step to recovery

  • assis.pontes.7 - 2013-03-19 17:42

    What are the options? Pay 9.9% tax and secure your money in the bank that will stay in business or run and contribute to the downfall of the banking system? Depositors stand to lose more than 10% if they run.

  • Luyolo Mhlauli - 2013-03-19 20:05

    What gets to me is the way those who introduced this and the media are calling this. This is not a package.This is not a rescue deal nor haircut. It is ROBBERY... Finish and Klaar. Imagine me taking 10 percent out of your bank account without your consent that's jailtime for me coz iv robbed you.

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