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Cyprus Has Little Room to Maneuver on Bank Deposit Levy: Frieden

March 18 (Bloomberg) -- The Cypriot government has little room to maneuver as it seeks to adjust a proposed bank deposit levy to raise 5.8 billion euros ($7.5 billion) as part of an international rescue package, Luxembourg Finance Minister Luc Frieden said.

The deposit tax “was a very difficult compromise” reached in 10 hours of talks last week by euro-area finance chiefs, the European Central Bank and the International Monetary Fund, Frieden said in an interview in Luxembourg today.

“I don’t think that there is a lot of room to maneuver,” he said. “We want to avoid the bankruptcy of Cyprus and the Cypriot banks, which would cause serious social and economic damage for all Cypriots. That’s what we wanted to avoid. I think that’s what we have achieved. A solution in such a difficult situation is never an ideal solution.”

The levy, as of now 6.75 percent of all deposits up to 100,000 euros and 9.9 percent above that, whittled the euro-area’s bailout of Cyprus to 10 billion euros, down from an original figure of about 17 billion euros, near the size of the nation’s 18 billion-euro economy.

Potential changes include taxing deposits less than 100,000 euros at a 3 percent rate, while setting the levy at 10 percent between 100,000 euros and 500,000 euros and at 12 percent for deposits greater than that, Antenna TV reported, without saying how it got the information.

Spending Cuts

“The euro zone wanted Cyprus to bring an amount of 7 billion euros” to the table, while the euro-area rescue fund would contribute 10 billion euros, Frieden said. Most euro countries opposed a full bail-in of investors, he said, and spending cuts wouldn’t have produced enough money.

As a result, “the idea came up of a one-off levy, which should be collected like a withholding tax,” Frieden said. “This was something that all euro-zone member states and the institutions -- the European Commission, the ECB and the IMF -- could support. That’s how this deal came about.”

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To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: Patrick Henry at phenry8@bloomberg.net

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