Lines formed at ATMs as people scrambled to pull their money out
Word spread that rescue package included a one-off levy on deposits
By Daily Mail Reporter
PUBLISHED: 11:23 EST, 16 March 2013
Worried savers have emptied ATMs across Cyprus after the cash-strapped country secured a €10billion (£8.7billion) bailout agreement that includes a levy on all the country's bank accounts.
The island nation has been bailed out by European partners and the International Monetary Fund in a bid to prevent it entering a bankruptcy which could rekindle the region's debt crisis.
Lines formed at many ATMs as people scrambled to pull their money out after word that the rescue package included a one-off levy on deposits, an unprecedented step in the eurozone crisis.
Panic: People queue withdraw their money from an ATM machine outside in Larnaca, Cyprus, after learning that the terms of a bailout deal includes a one-time levy on bank deposits
Panic: People queue withdraw their money from an ATM machine outside in Larnaca, Cyprus, after learning that the terms of a bailout deal includes a one-time levy on bank deposits
The levy is expected to raise €5.8billion but analysts have warned that making depositors take a hit threatens to undermine investors' confidence in other weaker eurozone economies and might possibly lead to bank runs.
European officials said people with less than €100,000 in their accounts will have to pay a one-time tax of 6.75 per cent, those owning more money will lose 9.9 per cent. Cypriot bank officials said that depositors can access all their money except the amount set by the levy.
But that hardly assuaged people who continued to withdraw cash from ATMs until the machines ran out, unsure what or how much would be taxed.
Officials said that withdrawing funds on Saturday would not reduce anyone's levy.
The country's co-operative banks also shut their doors after depositors scurried in hopes of protecting their savings.
Rescue package: The island national has been bailed out by European partners and the International Monetary Fund in a bid to prevent it entering a bankruptcy which could rekindle the region's debt crisis
Rescue package: The island national has been bailed out by European partners and the International Monetary Fund in a bid to prevent it entering a bankruptcy which could rekindle the region's debt crisis
Unlike commercial banks which remain closed on weekends, co-operative banks customarily open for business on Saturday.
The co-operative banks, which represent about a fifth of the island's banking sector, remained open only for a short time. However, people continued to have access to their funds through ATM machines.
'Politicians and senior bank bosses have covered each others' backs for years, now it's ordinary people who are paying the price and are being punished,' said Christos Demetriades, 58, milling outside a shut Nicosia co-operative bank branch.
Cyprus' Finance Minister Michalis Sarris defended the decision to accept the levy, saying it was either that or a complete economic meltdown
Cyprus' Finance Minister Michalis Sarris defended the decision to accept the levy, saying it was either that or a complete economic meltdown
'One disgruntled customer at a branch in the southern coastal town of Limassol briefly parked his tractor in front of its shut doors in a show of frustration.
Cyprus' Finance Minister Michalis Sarris defended the decision to accept the levy, saying it was either that or a complete economic meltdown.
'This was the least worst option,' he told state broadcaster CyBC. 'We battled to prevent the country from completely going bankrupt.'
News of the levy came as a shock to most people following strict assurances from Cyprus' President Nicos Anastasiades that he would not accept a deal which required depositors to share in the losses.
Cypriot and European officials feared that forcing depositors take a hit would undermine investors' confidence in Cyprus and other weaker eurozone economies - and even possibly lead to bank runs.
Cyprus has become the fourth euro area country to get a rescue package to save its banks that took massive losses because of their exposure to toxic Greek debt.
The levy stirred up a political firestorm on the tiny island of a million people, with some politicians accusing the government of leading the country to 'a tragic dead end'.
Government spokesman Christos Stylianides said Cypriot officials had resisted intense pressure to accept a deposit levy of a whopping 40 per cent.
Bank bosses are meeting with Central Bank officials to figure out their next steps, while Mr Anastasiades, who returns to Cyprus Saturday evening has called for a meeting of party leaders to assess the unfolding situation.
In return for the rescue loans, Cyprus will trim its deficit, significantly shrink its troubled banking sector, raise taxes and privatize state assets, said the Netherlands' Jeroen Dijsselbloem, president of the Eurogroup meetings of the 17-nation eurozone's finance ministers.
THE LEVY THAT HAS SHOCKED CYPRUS' DEPOSIT-HOLDERS
Cyprus' eurozone partners and the IMF agreed early Saturday to bail out Cyprus to the tune of 10billion euro ($13billion) - largely to prop up its flailing banking industry. But the deal, as usual, comes with strings attached. The one causing the most consternation is a levy on bank deposits held in Cypriot accounts. Here's a look at how that will work - and the problems it may pose.
HOW CAN THEY DO THAT?
Currently, all 17 European Union countries that use the euro offer deposit insurance to protect customers if their bank fails. But the measure in the Cyprus deal is a tax - not losses incurred because of a bank failure. In fact, it's meant to hold off a bank collapse. Countries have the right to raise or lower taxes whenever they want. Just ask the residents of Greece, Portugal and Ireland - all bailout recipients - who saw their tax bills skyrocket as those countries tried to reduce their debts. But Cyprus is charting new ground here, and there could be legal - and political - challenges.
AND HOW EXACTLY WILL THEY DO THAT?
Banks have already acted to seal off the amount of the levy - a 6.75 per cent tax on deposits under 100,000 euro and 9.9 per cent on those above - so depositors can't access it. Bank customers still can draw on the rest of their funds via ATM machines this weekend, and nervous depositors did that on Saturday to drain their accounts. But the few banks that opened on Saturdays did so only briefly, and no international transfers will be able to go through until Tuesday, since Monday is a holiday. Cyprus' Parliament is expected to meet Sunday to pass the required legislation. The deal also needs the approval of several eurozone parliaments; it's unclear how fast they can act and what will happen to bank deposits in the meantime.
HAS THIS EVER HAPPENED BEFORE?
So far in the euro crisis, depositors have been protected. But in the 1990s, Italy levied a tax on every bank account to stave off the collapse of its lire currency. The rate, however, was minuscule - 0.06 per cent - compared to what Cyprus is enacting. Iceland - another island with an outsized financial sector, although worse weather - also relied on depositors to prop up its banks. When the crisis hit there in 2008, Iceland protected its domestic deposits but reneged on deposit insurance for overseas, Internet-based accounts held by British and Dutch. Those two governments stepped in to help their citizens to the tune of $5billion. The U.K. and the Netherlands sued Iceland unsuccessfully in a European court to get their money back, but Iceland has nevertheless started to repay some of that money.
European officials are promising that Cyprus is a unique case, and they are right in one aspect: the country's banks are overwhelmingly funded by deposits, so it wouldn't have been very fruitful to go after bondholders.
WHO IS AFFECTED?
All depositors - except those in Greek branches, which will be sold to Greek banks. EU and IMF creditors clearly wanted to protect struggling Greece, but perhaps also saw that Greece is the most likely place in the eurozone for a bank run. Protecting depositors there minimizes that possibility. Of the about 68billion euro on deposit in Cypriot banks, foreigners hold about 40 per cent - and most of those are Russians. Cyprus could have only gone after non-EU depositors, but it may have been hard to distinguish between Cypriot and Russian savers, Jacob Kirkegaard said, since many Russians have dual citizenship and many Russian businesses are registered on the island. Kirkegaard, who is a senior fellow at the Peterson Institute for International Economics in Washington, said Cypriots may paradoxically welcome this measure since the government just managed to widen its tax base to include a lot of Russians; the taxes levied in Greece, Portugal and Ireland were for residents alone to shoulder.
WHY DID CYPRUS NEED A BAILOUT?
Cyprus built its economy in recent years by becoming a financial centre, much the way Ireland and Iceland had done. Its banks offered Internet accounts to foreigners, were renowned for their service and provided substantial privacy to clients in a country with very low tax rates. It worked so well that Cyprus' banking industry ballooned to nearly eight times the country's gross domestic product at the height of the boom. In December, it was still more than seven times Cyprus' 17.5billion euro GDP. Russians - looking for warmer climes, friendly tax rates and shared culture in the form of Orthodox Christianity - are thought to hold the majority of those, with about 20billion euro in the island's banks.
But Cyprus' banks held a lot of Greek debt and suffered significant losses when they took a write-down of those bonds as part of the Greek bailout. Much of Cyprus' bailout money will be used to recapitalise Cypriot banks to prevent them from collapsing. Like other eurozone countries, Cyprus has also seen its deficit and debt explode as growth has ground to a halt. And with the banking system so large, the government wouldn't have been able to bail it out even in a healthy economy.
WHAT WILL THE REACTION BE MONDAY?
Cyprus may be on holiday Monday, but the rest of the world will go back to work. Kirkegaard says that the decision to tap depositors indicates that the European Central Bank is confident that the risk of a bank run elsewhere in the eurozone is low - and by excluding Greek branches of Cypriot banks, they have reduced the possibility even further. Bond markets may react a little since bondholders were also tapped. Bank stocks will probably fall and they'll see their borrowing costs rise since this deal is a signal that other eurozone countries may call on bondholders, if their banks run into trouble.
But Heather Conley, director of Europe program for the Center for Strategic and International Studies, says it's hard to know the far-reaching implications of this one-off deal. The 'exceptions' created to solve Europe's debt crisis are adding up, she said. And some investors may look at this late-night, three-day-weekend deal and see what she saw: a dress rehearsal for a country dropping out of the euro.
DailyMailUK
Word spread that rescue package included a one-off levy on deposits
By Daily Mail Reporter
PUBLISHED: 11:23 EST, 16 March 2013
Worried savers have emptied ATMs across Cyprus after the cash-strapped country secured a €10billion (£8.7billion) bailout agreement that includes a levy on all the country's bank accounts.
The island nation has been bailed out by European partners and the International Monetary Fund in a bid to prevent it entering a bankruptcy which could rekindle the region's debt crisis.
Lines formed at many ATMs as people scrambled to pull their money out after word that the rescue package included a one-off levy on deposits, an unprecedented step in the eurozone crisis.
Panic: People queue withdraw their money from an ATM machine outside in Larnaca, Cyprus, after learning that the terms of a bailout deal includes a one-time levy on bank deposits
Panic: People queue withdraw their money from an ATM machine outside in Larnaca, Cyprus, after learning that the terms of a bailout deal includes a one-time levy on bank deposits
The levy is expected to raise €5.8billion but analysts have warned that making depositors take a hit threatens to undermine investors' confidence in other weaker eurozone economies and might possibly lead to bank runs.
European officials said people with less than €100,000 in their accounts will have to pay a one-time tax of 6.75 per cent, those owning more money will lose 9.9 per cent. Cypriot bank officials said that depositors can access all their money except the amount set by the levy.
But that hardly assuaged people who continued to withdraw cash from ATMs until the machines ran out, unsure what or how much would be taxed.
Officials said that withdrawing funds on Saturday would not reduce anyone's levy.
The country's co-operative banks also shut their doors after depositors scurried in hopes of protecting their savings.
Rescue package: The island national has been bailed out by European partners and the International Monetary Fund in a bid to prevent it entering a bankruptcy which could rekindle the region's debt crisis
Rescue package: The island national has been bailed out by European partners and the International Monetary Fund in a bid to prevent it entering a bankruptcy which could rekindle the region's debt crisis
Unlike commercial banks which remain closed on weekends, co-operative banks customarily open for business on Saturday.
The co-operative banks, which represent about a fifth of the island's banking sector, remained open only for a short time. However, people continued to have access to their funds through ATM machines.
'Politicians and senior bank bosses have covered each others' backs for years, now it's ordinary people who are paying the price and are being punished,' said Christos Demetriades, 58, milling outside a shut Nicosia co-operative bank branch.
Cyprus' Finance Minister Michalis Sarris defended the decision to accept the levy, saying it was either that or a complete economic meltdown
Cyprus' Finance Minister Michalis Sarris defended the decision to accept the levy, saying it was either that or a complete economic meltdown
 |
| Cyprus' Finance Minister Michalis Sarris defended the decision to accept the levy, saying it was either that or a complete economic meltdown |
Cyprus' Finance Minister Michalis Sarris defended the decision to accept the levy, saying it was either that or a complete economic meltdown.
'This was the least worst option,' he told state broadcaster CyBC. 'We battled to prevent the country from completely going bankrupt.'
News of the levy came as a shock to most people following strict assurances from Cyprus' President Nicos Anastasiades that he would not accept a deal which required depositors to share in the losses.
Cypriot and European officials feared that forcing depositors take a hit would undermine investors' confidence in Cyprus and other weaker eurozone economies - and even possibly lead to bank runs.
Cyprus has become the fourth euro area country to get a rescue package to save its banks that took massive losses because of their exposure to toxic Greek debt.
The levy stirred up a political firestorm on the tiny island of a million people, with some politicians accusing the government of leading the country to 'a tragic dead end'.
Government spokesman Christos Stylianides said Cypriot officials had resisted intense pressure to accept a deposit levy of a whopping 40 per cent.
Bank bosses are meeting with Central Bank officials to figure out their next steps, while Mr Anastasiades, who returns to Cyprus Saturday evening has called for a meeting of party leaders to assess the unfolding situation.
In return for the rescue loans, Cyprus will trim its deficit, significantly shrink its troubled banking sector, raise taxes and privatize state assets, said the Netherlands' Jeroen Dijsselbloem, president of the Eurogroup meetings of the 17-nation eurozone's finance ministers.
THE LEVY THAT HAS SHOCKED CYPRUS' DEPOSIT-HOLDERS
Cyprus' eurozone partners and the IMF agreed early Saturday to bail out Cyprus to the tune of 10billion euro ($13billion) - largely to prop up its flailing banking industry. But the deal, as usual, comes with strings attached. The one causing the most consternation is a levy on bank deposits held in Cypriot accounts. Here's a look at how that will work - and the problems it may pose.
HOW CAN THEY DO THAT?
Currently, all 17 European Union countries that use the euro offer deposit insurance to protect customers if their bank fails. But the measure in the Cyprus deal is a tax - not losses incurred because of a bank failure. In fact, it's meant to hold off a bank collapse. Countries have the right to raise or lower taxes whenever they want. Just ask the residents of Greece, Portugal and Ireland - all bailout recipients - who saw their tax bills skyrocket as those countries tried to reduce their debts. But Cyprus is charting new ground here, and there could be legal - and political - challenges.
AND HOW EXACTLY WILL THEY DO THAT?
Banks have already acted to seal off the amount of the levy - a 6.75 per cent tax on deposits under 100,000 euro and 9.9 per cent on those above - so depositors can't access it. Bank customers still can draw on the rest of their funds via ATM machines this weekend, and nervous depositors did that on Saturday to drain their accounts. But the few banks that opened on Saturdays did so only briefly, and no international transfers will be able to go through until Tuesday, since Monday is a holiday. Cyprus' Parliament is expected to meet Sunday to pass the required legislation. The deal also needs the approval of several eurozone parliaments; it's unclear how fast they can act and what will happen to bank deposits in the meantime.
HAS THIS EVER HAPPENED BEFORE?
So far in the euro crisis, depositors have been protected. But in the 1990s, Italy levied a tax on every bank account to stave off the collapse of its lire currency. The rate, however, was minuscule - 0.06 per cent - compared to what Cyprus is enacting. Iceland - another island with an outsized financial sector, although worse weather - also relied on depositors to prop up its banks. When the crisis hit there in 2008, Iceland protected its domestic deposits but reneged on deposit insurance for overseas, Internet-based accounts held by British and Dutch. Those two governments stepped in to help their citizens to the tune of $5billion. The U.K. and the Netherlands sued Iceland unsuccessfully in a European court to get their money back, but Iceland has nevertheless started to repay some of that money.
European officials are promising that Cyprus is a unique case, and they are right in one aspect: the country's banks are overwhelmingly funded by deposits, so it wouldn't have been very fruitful to go after bondholders.
WHO IS AFFECTED?
All depositors - except those in Greek branches, which will be sold to Greek banks. EU and IMF creditors clearly wanted to protect struggling Greece, but perhaps also saw that Greece is the most likely place in the eurozone for a bank run. Protecting depositors there minimizes that possibility. Of the about 68billion euro on deposit in Cypriot banks, foreigners hold about 40 per cent - and most of those are Russians. Cyprus could have only gone after non-EU depositors, but it may have been hard to distinguish between Cypriot and Russian savers, Jacob Kirkegaard said, since many Russians have dual citizenship and many Russian businesses are registered on the island. Kirkegaard, who is a senior fellow at the Peterson Institute for International Economics in Washington, said Cypriots may paradoxically welcome this measure since the government just managed to widen its tax base to include a lot of Russians; the taxes levied in Greece, Portugal and Ireland were for residents alone to shoulder.
WHY DID CYPRUS NEED A BAILOUT?
Cyprus built its economy in recent years by becoming a financial centre, much the way Ireland and Iceland had done. Its banks offered Internet accounts to foreigners, were renowned for their service and provided substantial privacy to clients in a country with very low tax rates. It worked so well that Cyprus' banking industry ballooned to nearly eight times the country's gross domestic product at the height of the boom. In December, it was still more than seven times Cyprus' 17.5billion euro GDP. Russians - looking for warmer climes, friendly tax rates and shared culture in the form of Orthodox Christianity - are thought to hold the majority of those, with about 20billion euro in the island's banks.
But Cyprus' banks held a lot of Greek debt and suffered significant losses when they took a write-down of those bonds as part of the Greek bailout. Much of Cyprus' bailout money will be used to recapitalise Cypriot banks to prevent them from collapsing. Like other eurozone countries, Cyprus has also seen its deficit and debt explode as growth has ground to a halt. And with the banking system so large, the government wouldn't have been able to bail it out even in a healthy economy.
WHAT WILL THE REACTION BE MONDAY?
Cyprus may be on holiday Monday, but the rest of the world will go back to work. Kirkegaard says that the decision to tap depositors indicates that the European Central Bank is confident that the risk of a bank run elsewhere in the eurozone is low - and by excluding Greek branches of Cypriot banks, they have reduced the possibility even further. Bond markets may react a little since bondholders were also tapped. Bank stocks will probably fall and they'll see their borrowing costs rise since this deal is a signal that other eurozone countries may call on bondholders, if their banks run into trouble.
But Heather Conley, director of Europe program for the Center for Strategic and International Studies, says it's hard to know the far-reaching implications of this one-off deal. The 'exceptions' created to solve Europe's debt crisis are adding up, she said. And some investors may look at this late-night, three-day-weekend deal and see what she saw: a dress rehearsal for a country dropping out of the euro.
DailyMailUK
