Euro-area finance ministers told Cyprus to raise 5.8 billion euros ($7.5 billion) from bank depositors to unlock emergency loans, maintaining the revenue target while suggesting sparing small-scale savers.
The finance chiefs from the 17 euro countries kept the pressure on Cyprus as they signaled flexibility in applying the tax announced three days ago. The levy sparked outrage in the island nation and concern among investors about setting a precedent by breaking the taboo against raiding bank accounts.
“Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on March 16, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance,” the ministers said in a statement following a teleconference late yesterday.
With Cypriot lawmakers voting today on how to spread the burden among account-holders and the proposed bank tax roiling markets, the U.S. called for a “responsible and fair” resolution to the financial crisis in Cyprus, the fifth euro country to seek a bailout since 2010. The euro slipped in early European trading on concern that Parliament will reject the deal.
The euro traded at $1.2942 as of 8:40 a.m. Frankfurt time, falling from as high as $1.2970. Futures on the Euro Stoxx 50 Index fell 0.4 percent.
“I don’t think about plan Bs,” French Finance Minister Pierre Moscovici said in Paris today. “We’re in a plan A. Everyone has to assume his responsibilities.”
Cypriot President Nicos Anastasiades told German Chancellor Angela Merkel in a call yesterday before the ministers’ call he didn’t think his lawmakers would pass the levy, according to a Cypriot government official.
Merkel told him that he could only negotiate a rescue package with the so-called troika, which comprises the European Commission, the European Central Bank and the International Monterary Fund, according to a German government official.
The Treasury Department is “monitoring the situation in Cyprus closely,” and Secretary Jacob J. Lew has been speaking with his European counterparts, the department said in an e-mailed statement. “It is important that Cyprus and its euro-area partners work to resolve the situation in a way that is responsible and fair and ensures financial stability.”
Cyprus could meet its target of generating 5.8 billion euros by imposing a 15.6 percent levy on bank deposits of more than 100,000 euros and no levy on deposits below that amount, a European Union official said on condition of anonymity.
The levy, part of the 10 billion-euro rescue package, initially called for a tax of 6.75 percent of all deposits up to 100,000 euros and 9.9 percent above that.
Cypriots woke up on March 16 to find bank transfers frozen as the country’s authorities prepared to remove the tax from accounts before banks were scheduled to reopen on March 19. The Cypriot central bank has since declared bank holidays until March 21 to avert the prospect of account-holders withdrawing all their savings.
Branches of Cypriot banks in Greece also will be closed, the Greek Finance Ministry said in a statement. Greek banks have expressed interest to the Bank of Greece in acquiring Greek units of Cypriot banks, the ministry said.
Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm since the ECB pledge in September to backstop troubled nations’ debt. With no government in Italy, Spain in the throes of a political scandal and Greece struggling to meet the terms of its own bailout, more turmoil could hamper efforts to end the crisis.
Television images of people lining up for cash in Cyprus have a very powerful “psychological contagion” effect, said former ECB Executive Board member Lorenzo Bini Smaghi.
“The television really scares people and not everybody knows how different Cyprus is from Italy or Spain,” Bini Smaghi said at a forum in Hong Kong today. He told Bloomberg Television earlier that the decision to levy bank deposits was made by Cyprus and not Europeans as a whole, and is in his view, an unfair choice.
Reserve Bank of Australia Deputy Governor Philip Lowe said the decision to force Cypriot savers into a bailout was a “step back” for the region and could increase instability in the financial system.
The Cypriot parliament will meet at 6 p.m. today after the session was postponed twice over the past two days as Anastasiades tried to muster support for a rescue that includes the euro area’s first move to penalize depositors. Parliament speaker Yiannakis Omirou said postponing the vote was to allow the government to examine changes to the legislation.
With Anastasiades’s Disy party holding 20 seats in the 56-seat legislature, he needs at least nine more votes to secure approval. The communist Akel party, which controls 19 seats, and the Edek party, with five seats, have both said they will vote against the bill. State-run CYBC said that DIKO, with eight seats, would also vote against the bill.
European officials have struggled to find an agreement that would rescue Cyprus, which accounts for less than half of a percent of the euro region’s economy, without unsettling investors in larger countries. Other elements of the rescue include asset sales and an increase in the corporate tax rate to 12.5 percent from 10 percent.