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Cyprus softens draft bill for smaller savers

Central bank warns of $7.5bn EU funding shortfall after proposal to scrap tax on savings of less than than 20,000 euros.
Last Modified: 19 Mar 2013 13:11

Cypriot government officials have proposed changes to a controversial EU bailout plan in order to limit the impact on small savers.

The amended bill would drop the tax on bank savings of fewer than 20,000 euros but retain the levy at 6.75 percent on deposits of 20,000-100,000 euros, and 9.9 percent for deposits of 100,000 euros or more.

Tuesday's bill was tabled before the House finance committee and was to be voted on by parliament later in the day.

However, the draft bill on the deposits levy does not compensate for the lost revenue by raising it for those who have deposits of more than 100,000 euros.

As a result, Panicos Demetriades, the central bank governor of Cyprus,  told a parliamentary committee on Tuesday that the country would fail to raise the required 5.8 billion euros ($7.52 billion) to secure a bailout from the EU if it scrapped the tax for smaller savers.

"We will take less than 5.8 billion euros," Demetriades said.

Investors unsettled

The eurozone told Cyprus on Monday to change its original plan, according to a statement issued after a meeting between Cypriot and EU officials.

The one-time tax was announced as part of an agreement that would see Cyprus granted a 10bn euro ($12.95bn) sovereign bailout to avoid defaulting on its debts.

The euro and European shares fell for a second day on Tuesday, with investors unsettled by the risk of failure for the bailout deal aimed at saving Cyprus from default and its banks from collapse.

 

US markets are expected to get off to a flat start due to the turmoil in the eurozone.

Eurogroup President Jeroen Dijsselbloem of The Netherlands said in a written statement on Monday finance ministers "continue to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below [$130,000]".

Parliamentary vote delayed

The economic and political fallout from the initial announcement on Saturday sparked angry protests outside the parliament building in Nicosia. Consumers rushed to banks and ATMs to try and withdraw their savings before the parliament ratified the measure.

The government said that the raid on savings was required alongside international loans to supplement the bailout, the fifth such bailout in the eurozone over the past three years.

Cyprus has shut its banks until at least Thursday  and delayed a parliamentary vote on the package until Tuesday.


German Finance Minister Wolfgang Schaeuble said on Tuesday the government and parliament of Cyprus and the people who deposited money there had to take
responsibility for the solvency problems that had made a bailout necessary.

Russian President Vladimir Putin called the move "dangerous", and turmoil hit stock and currency trades amid concerns a precedent had been set for bigger debt-saddled eurozone economies like Italy and Spain.

The hastily-convened ministerial talks saw Dijsselbloem "reiterate that the stability levy on deposits is a one-off measure" which, he said, would "restore the viability of the Cypriot banking system" when applied in tandem with eurozone and International Monetary Fund loans.

The statement on Monday said that emergency re-negotiations would see Nicosia "introduce more progressivity in the one-off levy", in other words increasing the tax rate on bigger holdings to ensure the same 5.8bn euro ($7.5bn) return.

Eurozone leaders rejected a Cypriot request for 17bn euros ($22bn) in rescue financing, insisting such a large debt would be unsustainable for the Mediterranean island of fewer than one million people.

They offered 10bn euros ($12.95bn) and insisted that the balance be made up from within the island, principally through the levy on bank deposits.

Al Jazeera's Peter Sharp, reporting from Nicosia, said President Nicos Anastasiades had spelled out what would happen without a bailout.

"It would mean bankruptcy for Cyprus, the collapse of the banking system and you could also see Cyprus going completely outside of the eurozone," Sharp said.

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