EUROZONE FINANCE ministers last night urged Cyprus to protect small savers’ deposits while still coming up with €5.8 billion from a deposit levy so the island’s €10 billion bailout could go ahead.

The Eurogroup appeared to show flexibility on the details of how Cyprus should implement the unprecedented haircut on bank deposits, following the blowback caused by its decision last Saturday to take 6.75 per cent from insured depositors with under €100,000 in a Cyprus-based bank, and 9.9 per cent from deposits over that amount.

The Cyprus deal sent shockwaves through financial markets yesterday, with shares, the euro and the bonds of southern eurozone countries sliding.

Uncertainty reigned as a Cypriot parliamentary vote on Saturday’s deal was postponed twice- from Sunday to Monday and then to Tuesday- with the government nowhere near certain of winning a majority vote.

The ongoing confusion led the Central Bank to announce yesterday that all banks will be closed today and tomorrow, likely in fear of a depositor’s bank run.

Ahead of a plenary session in the legislature, scheduled for 6pm today, the eurozone’s finance ministers held a teleconference call for one and a half hours last night to take a second look at their initial decision.

According to Reuters, the EU finance ministers said they favoured a higher, 15.6 percent hit for richer savers so more modest accounts could be spared.

Various reports suggest it was exactly this kind of deal that the Cypriot delegation in Brussels rejected at the weekend, fearing the destruction of their banking model which lures money from rich Russians and others.

It was not clear if Nicosia will accept it now but if it does, it would still need to raise €5.8 billion from the bank levy as planned, a Greek finance ministry source said, as well as get the levy passed through parliament.

“All Eurogroup ministers said (last night) they wished there was no tax below €100,000 but you can’t force a country to not do that,” the Greek source told Reuters.

“Cyprus doesn’t want to impose a large tax above €100,000 because the money will flow out. Two thirds of deposits are from abroad,” he added.

Eurogroup President Jeroen Dijsselbloem released a statement after the teleconference recalling that the weekend’s controversial decision was the product of “consensus” between the Cypriot government and the Eurogroup”.

He reiterated that the stability levy on deposits is a “one-off measure” to restore the viability of the Cypriot banking system and safeguard financial stability in Cyprus, adding that without it, deposit holders would be “significantly worse off”.

“The Eurogroup 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,” he said.

Dijsselbloem said the Cypriot authorities “will introduce more progressivity in the one-off levy compared to what was agreed” last Saturday, provided that it still raises the €5.8 billion demanded to release the €10bn rescue package.

The decision taken at the weekend in Brussels to raise €5.8 billion from Cypriot-held deposits across the board was widely viewed by foreign media and analysts as a bad decision that will lead to further uncertainty and undermine what little confidence there was in the eurozone and its banking system.

The Economist described the decision as “unfair, short-sighted and self-defeating”, while Forbes said the German-led group of EU officials who engineered the Cyprus bailout did a botch job after violating the principle pillar of modern banking- deposit insurance.

“If I were a saver, certainly in Spain or maybe Italy, I think I’d be looking askance at these measures and think this could yet happen to me,” said Peter Dixon, global financial economist at Commerzbank.

In Cyprus, the majority of people and parties were first in shock and then uproar, questioning why small Cyprus should be the first country in the eurozone to force a hit on depositors, and especially insured ones.

As the full effect of the initial decision hit home, EU leaders and banking officials appeared to show some flexibility on the details of a deal, while also trying to pass the buck on who’s decision it was to force losses on insured depositors.

“What happened at the weekend was a big buckle in confidence,” Austrian Finance Minister Maria Fekter told a panel discussion on the future on Europe yesterday.

She argued that the European Central Bank (ECB) and Cyprus rejected a sliding scale one-off tax on deposits going from 3.5 to 12.5 per cent, preferring instead to cap the levy at under 10 per cent.

“It is up to the government alone to decide if it wants to change the structure,” ECB policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, told reporters in Berlin. “The important thing is that the financial contribution of €5.8 billion remains.”

President Nicos Anastasiades last night chaired a meeting at the Presidential Palace including Central Bank governor Panicos Demetriades, cabinet members and finance ministry officials.

It remains to be seen what deal the government will present parliament today and whether it can be passed. As for the long-term, Cyprus will just have to wait and see what the final impact of the last few days will be on its economy and future.

Mixed reports doing the rounds yesterday suggested various scenarios where, in one case, depositors with under €20,000 or €25,000 would be spared the levy, while in another scenario all insured depositors would be taxed 3 per cent, 10 per cent would be slapped on depositers with €100,000 to €500,000 and accounts exceeding €500,000 would see a 15 per cent levy.

The last scenario to be heard came after last night’s Eurogroup meeting, and it follows the view that insured depositors be spared while the remainder get a 15.6 per cent levy.

“Essentially parliament is called to legalise a decision to rob depositors blind, against every written and unwritten law,” said House Speaker and EDEK leader Yiannakis Omirou earlier in the day, adding, “We refuse to subscribe to this”.

CB governor Demetriades told parliament yesterday: “The most important question is what would happen the following day if the bill isn’t voted.”

He added: “What would certainly happen is that our two big banks would need to be consolidated. This doesn’t mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way.”

Demetriades is reportedly against taxing insured depositors to raise the funds demanded by the troika as a precondition for the bailout, noting that this undermines trust in the banking system.

Earlier yesterday, Finance Minister Michalis Sarris commented on his role in the weekend’s shock decision. Sarris reminded MPs that the government adamantly against any haircut, adding that Cyprus had proposed taxation on interests for a three-year period, yielding an amount that would be close to the funds required, but the IMF and countries such as The Netherlands, Finland and Germany insisted on a levy on all deposits.

German Finance Minister Wolfgang Schaeuble deflected blame for the hit on small savers yesterday saying this solution “was not the creation of the German government”.

Schaeuble added that the Cypriot business model of attracting capital with low taxes and favourable legal regulation had proven to be unsustainable. But it had been “imperative in the interest of defending our common currency” to offer Cyprus aid.

The Presidential Palace yesterday categorically denied that Anastasiades ever had the choice of not taxing deposits under €100,000.

In a written statement, government spokesman Christos Stylianides said Anastasiades fought to avert this “unprecedented development” which “has been imposed in a coercive manner by those who try today to justify their own decisions”.

Their position was that by not taxing insured depositors Cyprus would not secure the necessary bailout sum, he added.

Published by:  www.cyprus-mail.com