European stock markets have fallen on concerns that a levy on bank deposits in Cyprus, designed to re-capitalise the island and its overstretched banking system and termed a ‘bail in’, could reactive the eurozone crisis.
Cyprus’s recently-elected president, Nicos Anastasiades said that the tax on savings was the only way of averting catastrophe as two Cypriot banks could otherwise run out of money within days and force Cyprus into a default. The traditional taxpayer-funded bailout option was not possible, as Germany did not want to commit its taxpayers’ money to funding yet another southern European country.
In addition, the large amount of Russian money in Cyprus, much of it allegedly being laundered, promoted the strict ‘bail in’ conditions, with savers losing up to 10% but getting bank shares in return.
President Anastasiades is seeking parliamentary support for a €10bn assistance package agreed with the European Union (EU) and the International Monetary Fund (IMF), for which one of the terms was a tax on savings held in Cyprus bank accounts. Banks on the island are closed to today and there are fears that Cypriots will attempt to withdraw their savings once they reopen after a few days’ holiday.
Anastasiades announced that he was in talks and would attempt to limit the bailout’s effect on smaller savers, but stressed there was little other choice to save Cyprus after its banks took huge losses from the debt write-down in Greece.
“We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” he said in a statement.
Under the terms of the package agreed in Brussels before the weekend, a financial burden is placed directly on Cypriot citizens, with a levy of 6.75% deducted on banks deposits of up to €100,000 and 9.9% on totals of more than €100,000.
Cypriots queued outside ATMs across the island at the weekend, but many were unable to withdraw their money. Although the government denied the machines had been disabled, a leaked document from the Central Bank of Cyprus published on a local news website suggested that credit institutions had been ordered to freeze all transfers until further notice.