Cyprus’ president is trying to amend a key condition of a draconian eurozone bailout plan that would tax deposits in the country’s banks to reduce its effect on small savers.
But in a nationally-televised speech, President Nicos Anastasiades also urged MPs to approve the tax in a vote today, saying it was essential to save the country from bankruptcy.
About 25 politicians from the communist-rooted AKEL party, the socialist EDEK and the Greens said they would not vote for the tax in the 56-seat Cypriot parliament amid deep resentment over a move some called disastrous. If Parliament rejects the tax, that would put the entire aid package in jeopardy.
The vote was initially set for yesterday but was postponed until today – a national holiday in Cyprus. On Saturday frightened savers rushed to ATMs to withdraw as much of their cash as they could.
Cypriot officials have expressed fears of a fully-fledged bank run once lenders reopen their doors tomorrow.
The announcement of the vote postponement set off an immediate scramble among top European financial officials. One said the European Central Bank was pressuring Cypriot authorities to hold the vote without delay.
“I completely share the unpleasant sentiment that this difficult and onerous decision has caused,” Mr Anastasiades said. “That’s why I continue to give battle so that the decisions of the eurozone are amended in the next hours to limit the effect on small depositors.”
In exchange for 10 billion euro (£9bn) in rescue money, creditors would impose a one-time tax of 6.75% on all bank deposits under 100,000 euros (£87.000) and 9.9 % over that amount.
A senior official said the government wanted to reduce the tax on bank deposits under €100,000, with a corresponding increase in the tax on deposits over that amount.
The deposit tax is part of a bailout agreement reached early on Saturday after talks by finance ministers from eurozone countries and representatives of the International Monetary Fund and the European Central Bank.
The Cypriot bailout follows those for Ireland, Greece, Portugal, and the Spanish banking sector, and it is the first one that dips into people’s savings to finance a bailout.
Analysts worry the move could rock international markets and jeopardise Europe’s fragile economies.
Officials in Spain and Italy tried over the weekend to reassure their citizens by saying the situation in Cyprus is unique, and that bank deposits in their countries would remain safe.
In Cyprus, the levy – which also would hit wealthy Russian depositors who have put vast sums into Cyprus’ banks in recent years – is expected to raise €5.8bn to recapitalise the nation’s banks and service the country’s debt.
Cypriot banks got into trouble after losing some €4.5bn on their Greek government bond holdings after eurozone leaders decided to write down Greece’s debt last year.
Mr Anastasiades did not provide any specifics on what he would do to try to limit the pain on small depositors, but he explained why he decided to consent to the taxes.
Mr Anastasiades, who only assumed the Cypriot presidency on March 1, had vehemently rejected any idea of going after deposits to help pay for a bailout during the campaign and after his election.
“The solution that we have reached is certainly not the one we wanted, but it is the least painful under the circumstances because above all it leaves the management of our economy in our own hands,” he said yesterday.
He said the tax would only be as much as the interest collected on deposits over two years and stressed that it would only happen once because it would ensure the bailout would not push the country’s debt to unsustainable levels.
Mr Anastasiades said savers would be compensated with bank shares and all depositors who opt to keep their money in Cypriot banks for at least two years would receive government bonds with a value equal to their losses. The bonds will be backed up by future revenue generated from the country’s new-found offshore gas deposits.
He said pension and provident funds would remain untouched and there would not be any need for further salary and pension cuts or an earlier demand by creditors for a financial transaction tax, which would have damaged Cyprus’ financial services-driven economy.
Cypriot MPs have already approved a raft of cuts to government worker salaries and pensions as well as tax increases under a preliminary bailout deal.
The president said if he had not accepted the tax on bank deposits, the European Central Bank would have stopped providing emergency funds to the country’s top two lenders which would have led to the collapse of the banking system, the bankruptcy of thousands of small businesses, massive job losses, and ultimately the country’s exit from the euro.