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Cyprus (2): Protecting Small Bank Accounts Or Destroying Financial Relations With Russia..?

Although the parliament dynamics in Cyprus are very sensitive, the government in Nicosia hopes to pass a bank tax on deposits, as the Euro Zone officials seem to soften their initial hard position on the issue:

Cyprus heads for cliffhanger parliamentary vote on deposits tax – Reuters

The government of Cyprus is hoping to push a divisive tax on bank deposits through parliament on Tuesday in a bid to stave off a default that could reignite the euro zone crisis. Breaking with previous practice that depositors’ savings were inviolable, euro zone finance ministers announced over the weekend a one-off tax on Cypriot bank accounts would be imposed as part of a 10 billion euro ($13 billion) bailout by the European Union. The measure infuriated ordinary Cypriots, who staged noisy demonstrations in the capital, Nicosia.Cypriot and euro zone officials have since sought to soften the initially proposed levy of 6.75 percent on depositors of up to 100,000 euros and 9.9 percent above 100,000 in order to ease the burden on small savers and overcome lawmaker opposition. But passing the bill in parliament is still far from certain. Tuesday’s vote, originally planned for Sunday, has been postponed twice already in an effort to build consensus in a fractious parliament where no party has an absolute majority. Three parties have said outright they will not support the tax.

Cyprus Bailout 2

More importantly, the Euro Zone Finance Ministers have urged Cyprus to let smaller bank account holders escape the proposed bank tax:

European Leaders Urge Cyprus Not To Tax Bank Accounts With …

Euro zone ministers urged Cyprus to let smaller savers escape a levy on bank deposits, before a parliamentary vote on Tuesday that will either secure the island’s financial rescue or threaten default. A weekend announcement that Cyprus would impose a levy on bank accounts as part of a 10 billion euro ($13 billion) bailout by the European Union broke with previous practice that depositors’ savings were sacrosanct. The euro and stock markets fell on concern that developments in tiny Cyprus could reignite the financial crisis in the 17-nation euro zone, while angry Cypriots staged protests outside their heavily guarded parliament. Before Tuesday’s vote, which is too close to call and would send reverberations across the currency area if lost, euro zone finance ministers held an evening teleconference and said depositors with less than 100,000 euros should be protected, officials said. Under the deal struck in Brussels on Saturday, bank deposits under that level would have faced a levy of 6.7 percent, ripping up the protection savers thought they enjoyed on insured deposits up to that limit, while those above would be stung for 9.9 percent. The finance ministers said they favoured a higher, 15.6 percent hit for richer savers, so more modest accounts could be spared. That would look similar to a deal the Cypriots, fearing the destruction of their banking model which lures money from rich Russians and others, baulked at in Brussels at the weekend.

On the other hand, the guarantee of deposits under 100,000 euros is a central issue for the Euro Zone countries:

Eurozone ministers urge Cyprus to shield small savers

Since the start of the financial crisis there has been a guarantee that deposits under 100,000 euros in banks in the EU would be protected. Many observers believe the Cypriot levy breaks the spirit of that agreement, and there is concern that it could also damage the confidence of depositors in other eurozone countries, reports the BBC’s Chris Morris in Brussels.  Eurozone finance ministers – the Eurogroup – discussed the situation in a conference call on Monday evening. Following the talks, its president Jeroen Dijsselbloem issued a statement saying the group “continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below 100,000 euros”. He said Cyprus would “introduce more progressivity in the one-off levy” – in other words, shift the burden away from small savers towards bigger depositors – provided that the same amount of funds, 5.8bn euros, was raised. Mr Dijsselbloem urged “a swift decision by the Cypriot authorities and parliament to rapidly implement the agreed measures”.

 

Finally, even if the government in Nicosia achieves to protect bank accounts smaller than 100,000 Euros it has to face the most important topic of its investment and financial relations with Russia. Both parties need each other, and they need to develop creative diplomatic and negotiation approaches for solving the problem. Possible financial implications are not limited only to Cyprus.



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