Cyprus to Impose Controversial Bank Levy on Savers
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Eurozone leaders on Saturday agreed to hand Cyprus a bailout worth 10 billion euros but on the condition that local savers forfeit up to 10 percent of their deposits to stave off a sovereign bankruptcy.
Under a controversial deal struck with international bailout lenders after all-night Friday talks, all deposits in the island’s banks will be hit with a levy as a condition for a desperately needed 10 billion euros bailout.
Eurozone leaders on Saturday agreed to hand Cyprus a bailout worth 10 billion euros but on the condition that local savers forfeit up to 10 percent of their deposits to stave off a sovereign bankruptcy.
Under a controversial deal struck with international bailout lenders after all-night Friday talks, all deposits in the island’s banks will be hit with a levy as a condition for a desperately needed 10 billion euros bailout.
Deposits of more than 100,000 euros will be hit with a 9.9 percent charge, while under that threshold the levy drops to 6.75 percent. The move is expected to raise almost 6 billion euros.
The decision, announced on Saturday morning, stunned Cypriots and prompted a run on cashpoints, most of which were depleted by midday. To guard against capital flight, Cyprus also took immediate steps to prevent electronic money transfers over the weekend.
An emergency parliament session scheduled for Sunday was postponed for a day to give more time for consultations and broker a deal, political sources said.
The levy is scheduled to come into force on Tuesday, after a bank holiday on Monday, but Cypriot authorities are considering an additional bank holiday on Tuesday pending emergency parliamentary ratification of the deal.
President Nicos Anastasiades, elected three weeks ago with a pledge to negotiate a swift bailout, warned that refusal to agree to the bailout terms would lead to the collapse of the island’s two largest banks and unravel investor confidence fostered by the European Central Bank.
“Cyrpus is in a state of emergency,” Anastasiades said. “These are the most tragic events we have faced since 1974,” when the Turkish military intervention following a Greek-inspired coup split the island and triggered an economic collapse.
“This solution is not what we wanted … but it leaves the running of the economy in our hands and it opens the road to recovery and prosperity,” he said.
The Cypriot government on Sunday discussed with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for above that sum, a source close to the consultations told Reuters on condition of anonymity.
The source added the discussions had the “blessing” of a troika of lenders from the European Commission, the IMF and the European Central Bank.
“I fully share the unhappiness caused by a difficult and painful decision. That is why I continue to fight with the eurogroup to amend their decisions in the coming hours to limit the impact on small depositors,” the president said.
[quote] According to Anastasiades, depositors will be compensated with the equivalent amount in shares in their banks, guaranteed by future natural gas revenues. [/quote]
Cyprus is expecting the results of an offshore appraisal drilling this year to confirm the island is sitting on vast amounts of natural gas worth billions.
Analysts however are concerned that developments in Cyprus may affect other bigger eurozone economies, which may require bailouts in the future. Some fear that, if approved, the plan may set a precedent for those countries.
“There will certainly be confusion in Cyprus and investors looking just at headlines may fret about its case becoming a model,” said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
David Nangle, head of equity research for Renaissance Capital, a Moscow-based investment bank, said the “bigger questions will be around Cyprus and its position as a hub for the Russian offshore wealth.”
Almost half of Cyprus’ bank depositors are believed to be non-resident Russians who stand to lose up to 2 billion euros, said several bankers in Nicosia.
Related Story: Cyprus Bailout: The Death Of National Sovereignty?
