European policy makers yesterday signalled flexibility on the application of an unprecedented bank tax in Cyprus, seeking to overcome outrage that threatens to derail the nation’s bailout.
While demanding that the levy raise the targeted €5.8bn, finance officials said easing the cost to smaller savers was up to Cyprus. A vote on the tax, needed to secure €10bn in rescue loans, was delayed for a second day until today. Banks will remain shut until Thursday, a government official said.
Moody’s Investors Service said that the move is a significant step toward limiting support for bank creditors across Europe and shows that policy makers will risk financial market disruptions to avoid sovereign defaults.
The tax is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” Joachim Fels, chief international economist at Morgan Stanley in London, wrote.
Scenes of Cypriots lining up at cash machines raised the spectre of capital flight elsewhere and threatened to disrupt a market calm since the ECB pledge in September to backstop troubled nations’ debt. With no government in Italy, Spain in the throes of a political scandal and Greece struggling to meet the terms of its own bailout, more turmoil could hamper efforts to end the crisis.
In a bid to ease a run on banks, depositors who keep their account for two years will receive securities linked to future revenue from the country’s gas reserves, the president said.
In Cyprus, where a poll showed 71% of Cypriots said parliament should reject the levy, the immediate effects were on display. Many cash machines ran out of money, including cooperative bank ATMs, Erotokritos Chlorakiotis, its general manager, said yesterday.
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