Cyprus Bank-Levy Passage in Doubt as EU Shows Flexibility
Cypriot lawmakers were poised to reject an unprecedented levy on bank deposits in a parliamentary vote, risking renewed euro turmoil and raising the prospect of the country’s default.
Parliament began debating the measure about 6 p.m. in the Cypriot capital, Nicosia, after President Nicos Anastasiades told German Chancellor Angela Merkel in a phone call that he doesn’t have the support to pass it. Lawmakers “feel and think it isn’t just and that it’s against the interest of Cyprus,” he told Sweden’s TV4 channel in an interview today.
The Mediterranean island nation’s banks and stock exchange will remain closed at least through tomorrow as the new Cypriot president seeks backing for the 5.8 billion-euro ($7.5 billion) levy on bank deposits, a measure needed to win 10 billion euros in international aid. Finance chiefs from the 17-member euro area urged Cyprus late yesterday to spare small-scale savers, as they maintained the size of their demand on account holders.
“There is no precedent for what would happen if Cyprus rejected the conditions,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note. “Our best guess is that Europe would give Cyprus a brief and final chance to rethink and vote again.”
Race to Reassure
While Cyprus accounts for less than half a percent of the euro economy, the fight over the bank tax risks triggering new tumult in the financial crisis that began in 2009 in Greece. With the euro dropping to a three-month low against the dollar, European policy makers raced to reassure investors that the bank tax was unique to Cyprus and did not set a precedent elsewhere in the single currency area.
“We will make sure that deposits in Europe are safe,” Luxembourg Finance Minister Luc Frieden said in a Bloomberg TV interview. “This cannot be seen as destroying the confidence that people have” in the European financial system.
The euro, which tumbled 0.9 percent yesterday, dropped 0.6 percent to $1.2884 as of 5:40 p.m. Frankfurt time. European stocks fell for a third day, with the Stoxx Europe 600 Index (SXXP) down 0.4 percent. Spanish 10-year bonds fell for a fifth day, as the yield climbed 7 basis points to 5.01 percent.
The Cypriot government submitted a revised bill that exempts deposits up to 20,000 euros as finance ministers backtracked on the levy’s structure. The plan initially called for a 6.75 percent tax on all of savers’ deposits under 100,000 euros and 9.9 percent above that amount. Defense Minister Fotis Fotiou told Greek Skai TV his government was working on various scenarios to raise the sum required as a condition for aid.
“Things were confused” after the measures were announced, French Finance Minister Pierre Moscovici said in Paris today. “The perception was confused. Once this confusion was born, we had to revisit the decision.”
The raid on bank accounts, designed to lighten the load on European and international creditors, sparked outrage when Cypriots awoke March 16 after marathon negotiations in Brussels to find bank transfers blocked. It also revived speculation of a euro breakup.
A complete rejection of the deposit levy by the Cypriot parliament would mean Cyprus forgoing European assistance and could lead to a sovereign default, or even an exit from the currency union, Berenberg’s Schmieding said.
“I dread that discussion may start again,” Fiat SpA Chief Executive Officer Sergio Marchionne said in Geneva. “If you ask me if it’s likely it will happen or be a real risk, I’d say no. The problem is that the problem is arising again. We saw Cyprus and new taxes, drastic solutions which have difficult consequences in Europe.”
European policy makers would consider ramping up pressure on Cyprus in the event of a breakdown over the deposit tax, which Moscovici called breaking a “taboo,” said a European official who asked not to be named. Among the potential measures is cutting off funds to the nation’s banks through the European Central Bank’s Emergency Liquidity Assistance program.
Anastasiades, who took office on Feb. 28, addressed the nation on March 17, exhorting political factions to support the levy. Calling the crisis Cyprus’s worst moment since the 1974 Turkish invasion that left the country divided, he said the country would otherwise risk the “indescribable misery” of a collapse of the banking sector.
The Cypriot president was rebuffed during his phone call with Merkel. The German chancellor told him that he can only negotiate a rescue with the so-called troika, which comprises the European Commission, the ECB and the International Monetary Fund, according to a German government official.
“What we have seen in the last few days is a very serious blunder by European governments that essentially are blackmailing the government of Cyprus to confiscate the money that belongs rightfully to depositors,” former Cyprus central banker Athanasios Orphanides said on “Bloomberg Surveillance” with Tom Keene. “It’s not clear how this can affect in a positive manner the European project going forward.”
Once banks on the island reopen, the country could see more than 7 billion euros in outflows, or about 10 percent of the total, state-run RIK TV cited Central Bank Governor Panicos Demetriades as telling a parliamentary committee.
The bank levy and additional tax measures reduced the rescue package to 10 billion euros from about 17 billion euros to meet the IMF’s demand for debt sustainability and German politicians’ skepticism over financial transfers.
German Finance Minister Wolfgang Schaeuble said there was no other option if the troika wanted to keep the price tag for the bailout at 10 billion euros.
“Naturally, the Cypriot president tried to find a way around it, but there was none,” Schaeuble said in an interview on Deutschlandfunk today. He added that the levy doesn’t violate deposit guarantees, because such protections are “only as good as a state’s solvency.”
Schaeuble later told German lawmakers that he felt sorry for Cypriots who were facing an uncommonly critical situation, yet the country had been using the wrong business model for a long time, according a party official who spoke on condition of anonymity because the briefing was private.
Anastasiades, whose Disy party holds 20 seats in the country’s 56-seat legislature, will need the support of other political factions, some of which have said they’ll vote no.
Cypriot lawmakers may call the troika’s bluff, Tristan Cooper, a fixed-income sovereign credit analyst at Fidelity Worldwide Investment, said in a release. It’s highly unlikely the ECB would carry out its threat to cut off Cypriot banks from liquidity in event of a “no” vote and more horse-trading would probably follow, with the troika possibly offering to contribute more to the bailout, Cooper said.
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