The Cyprus bank account levy plan sent has sent shockwaves across Europe with savers in other countries now fearing their money may not be safe.
A weekend agreement between Cyprus and its European partners called for the government to raid bank accounts as part of a 15.8 billion euro financial bailout, the first time in the eurozone’s crisis that the prospect of seizing individuals’ savings has been raised.
Facing outrage, Cyprus’ government delayed a parliamentary vote on the seizure and ordered banks to remain shut until Thursday while it tries to modify the deal to reduce the hit on people with small deposits.
Several hundred people gathered outside the vacant parliament building, with some chanting “thieves, thieves.”
“We’re very angry, betrayed, hurt and extremely disappointed,” said protester Andriana Constantinou.
In order to get 10 billion euros in bailout loans from international creditors, Cyprus agreed to take a percentage of all deposits – including ordinary citizens’ savings. The surprise deal stoked fears that deposits in other countries could be targeted.
“The damage is done,” said Louise Cooper, who heads financial research firm CooperCity. “Europeans now know that their savings could be used to bail out banks.”
The euro and stocks around the world took a hit even though the Cypriot economy accounts for only 0.2% of the combined output of the 17 European Union countries that use the currency.
The Cypriot government is now trying to modify the terms of the original plan and in particular to get a better deal for small savers with less than €100,000. The deal foresaw a one-off charge of 6.75% on those savings, rising to 9.9% for those with more.
While trying to make the package more appetising for those with low savings, the government has to make sure that the total raised remains the same.
One solution doing the rounds is to make the tax more graduated: placing a one-time 3% levy on deposits below €100,000, rising to 15% for those above €500,000.
The government has a battle to get a majority in the 56-member Parliament after 25 MPs from communist AKEL, socialist EDEK and the Green party said they would vote down the levy that they have criticised as disastrous.
Any modification to the deposit seizure must be approved by the other finance ministers in the eurozone – who will hold a phone conference – before the Cypriot parliament can vote on it.
The stakes are high for the country of a million people, because a rejection of the package could see the country go bankrupt and possibly out of the euro. Officials also fear a run on Cypriot banks no matter which way the voting goes, though immediate consequences for other eurozone countries are limited.
The decision by Cyprus’ 16 partners in the eurozone and the International Monetary Fund marks a significant shift in the way the debt crisis is being addressed. It is the first time that savings have been touched in a financial bailout. While it is not expected to cause a run on banks in Italy or Spain, it may make savers more likely to withdraw their funds.
“This sets a worrying precedent for Spain and Italy, but doesn’t make widespread bank runs imminent,” said Dario Perkins, an analyst at Lombard Street Research.
Cypriot authorities said they had no choice in the matter.
“I believe (the levy) was a bad idea but they imposed it on us,” Cypriot finance minister Michalis Sarris said.
A Cyprus government spokesman accused eurozone countries of using “blackmail tactics” by insisting that if Cyprus did not raid savings accounts, it would have to immediately shut down the country’s top two lenders.
One of the main reasons given for the raid on deposits is that Cyprus’ banks, which are in deep trouble after taking huge losses on bad Greek debt, are eight times the size of the economy. The Cypriot government would be unable to pay back the amount of loans it would need to rescue the banks.
Another reason for the raid is that Russian money accounts for a large part of the banks’ deposits.
An estimated €20bn of Russian money sits in Cypriot banks, part of it thought to be linked to money-laundering. European officials were loathe to give Cyprus bailout loans to protect those Russians’ savings.