Brussels, 18/03/2013 (Agence Europe) - People had had the impression that the aid deal for Cyprus had gone through, but that was without considering the fact that it was unlikely that the deal with the eurozone and IMF would get endorsed on the island itself (see EUROPE 10808). On Monday 18 March, the Cypriot government was trying to soften the blow for holders of accounts in Cypriot banks, by sharing out the burden differently among savers. The Eurogroup (eurozone finance ministers) was due to discuss the Cypriot aid deal again on Monday evening by video conference following a meeting of the euro working group earlier that evening.
The deal agreed in the early hours of Saturday morning was for savings of below €100,000 to be taxed at 6.75%, and for higher savings to be taxed at 9.9%, which would raise €5.8 billion to reduce the amount of cash needed from the eurozone and IMF to €10 billion (55% of Cypriot GDP).
The Cypriot parliament was due to decide on the tax over the weekend, but this has now been postponed until Tuesday 19 March. A Cypriot source says it was not possible to reach agreement on backing the bank account levy in the current form even within the coalition government. It is generally admitted that the initial €17 billion of aid, the same as the country's annual GDP, would have made the country's debt unsustainable, but Cyprus wants to do more to protect small savers' cash. The European Central Bank, the European Commission and the French government (and other countries) sent a positive signal on Monday by saying it was up to Cyprus to decide how to share the burden as long as the same amount of money is drummed up (€5.8 billion).
One idea on the drawing board is to tax savings of up to €100,000 by 3% (or zero) and to take savings of between €100,000 and €500,000 at 10%, and savings of above €0.5 million at 12%. It is hard to say whether this idea will go through. The same Cypriot source says the idea is to come up with a breakdown that has a chance of getting voted through by the country's parliament.
The percentage and amounts suggested by the Eurogroup were initially proposed by Cyprus, explains an EU source, echoed by the German finance minister, Wolfgang Schaüble - who said on Sunday that the people who had decided on this solution were the Cypriot government, the European Commission and the European Central Bank. He said that Germany would obviously have respected the idea of savings of less than a €100,000 being exempt from the levy.
The eurozone says the measure is exceptional and is due to the nature of the Cypriot problem because its banking industry is five times bigger than its economy so the country was getting into debt in order to bail out its banks - to the tune of €10 billion, explained a source close to the negotiations.
Moscow slams the bailout package. The Cypriot finance minister, Michalis Sarris, said that now a deal has been done with the eurozone, it would make talks with Russia easier over relaxing the repayment conditions for a €2.5 billion loan received from Russia in 2011. But the Russian finance minister, Anton Siluano, is quoted by Reuters as criticising the eurozone for introducing a levy on savings without consulting the Russian government, explaining that Russia and the eurozone had agreed to coordinate their action. He added that Russia would be examining the Cypriot request for an easing of its loan conditions in the light of this unilateral decision by the eurozone. The Russian prime minister, Dimitri Medvedev, said the savings tax amounted to a confiscation of foreign assets because it is also being levied on non-residents, many of them Russian. Branches of Cypriot banks abroad will not be hit by the tax. Sarris will be discussing the matter by telephone with his Russian counterpart on Monday before travelling to Moscow on Wednesday.
Little praise from politicians. The former head of the Eurogroup, Luxembourg's prime minister Jean-Claude Juncker, said in Vienna on Monday that the plan too which the eurozone had agreed had “shortcomings” and he feared it would lead to lack of trust “not just among banks, but also among ordinary people”. Sharon Bowles (ALDE, UK) who heads the European Parliament's economic and monetary affairs committee, said the deal was “disastrous for European rules and the single market”. To avoid a run on the banks, Cyprus' banks will not be opening until Thursday. (EL/transl.fl)