SUBHEAD: Failure to secure emergency loans from the EU would leave Cyprus facing a banking collapse and default.
By Mark Thompson on 19 March 2013 for CNN Money -
(http://money.cnn.com/2013/03/19/news/economy/cyprus-bailout-europe/index.html)
Image above: Demonstrators on Cyprus say "NO" to bailout conditions that would take money out of depositor's accounts. From original article.
Lawmakers in Cyprus have rejected government plans to impose an unprecedented tax on bank deposits, throwing into doubt a 10 billion euro bailout agreed with the European Union just three days ago.
Failure to secure emergency loans from the EU would leave Cyprus facing a banking collapse and default.
The bailout, while small compared to the rescue packages for other troubled EU nations like Greece, represents more than half the size of the 18 billion euro Cyprus economy.
The proposed tax on deposits, unprecedented in a eurozone bailout, led to a run on cash machines in Cyprus over the weekend, sparked big protests outside parliament and shook financial markets Monday.
Officials had made changes to the proposals to protect depositors with less than 20,000 euros in their accounts, but plans to levy a tax of 6.75% on deposits of 20,000-100,000 euros and 9.9% on anything above 100,000 euros proved unacceptable to parliament.
The party of President Nicos Anastasiades, who negotiated the deal with the EU, abstained.
Banks in Cyprus will remain closed until at least Thursday. Unable to function without the services of the banking sector, the Cyprus Stock Exchange has announced it will stay closed as well. ATMs were still functioning, according to CNN reporters.
The most controversial provision of the bailout was the tax on deposits, which are protected in Cyprus, as in the rest of the EU, to a level of 100,000 euros. As compensation, depositors would have been offered bank shares, underwritten by income from as-yet undeveloped natural gas deposits in Cypriot waters.
Cyprus was reluctant to increase the levy on larger amounts. It feared it would scare away international investors drawn by its low corporate tax rate and open economy -- in particular, Russians who hold as much as a third of the country's bank deposits.
The country first asked the EU for help last June. But talks were hampered by the reluctance of a previous government to accept terms, and also by EU concerns about money laundering.
Russia has come to Cyprus' aid in the past, providing a 2.5 billion euro loan in 2011 to shore up government finances. But its participation in the new rescue was looking uncertain after President Vladimir Putin attacked the tax on bank deposits as "unprofessional and dangerous".
A finance ministry spokesman said Russia was reviewing its position after not being consulted on the decision to impose the levy. Cypriot Finance Minister Michalis Sarris was traveling to Moscow for talks on Wednesday.
Cyprus is the fourth of 17 eurozone states to be granted a bailout by its EU partners and the IMF, after Greece, Ireland and Portugal. Spain has been given EU assistance to rescue its banks, but has so far avoided asking for a full sovereign bailout.
See also:
Ea O Ka Aina: Cyprus Seizure of Savings 3/18/13
.
By Mark Thompson on 19 March 2013 for CNN Money -
(http://money.cnn.com/2013/03/19/news/economy/cyprus-bailout-europe/index.html)
Image above: Demonstrators on Cyprus say "NO" to bailout conditions that would take money out of depositor's accounts. From original article.
Lawmakers in Cyprus have rejected government plans to impose an unprecedented tax on bank deposits, throwing into doubt a 10 billion euro bailout agreed with the European Union just three days ago.
Failure to secure emergency loans from the EU would leave Cyprus facing a banking collapse and default.
The bailout, while small compared to the rescue packages for other troubled EU nations like Greece, represents more than half the size of the 18 billion euro Cyprus economy.
The proposed tax on deposits, unprecedented in a eurozone bailout, led to a run on cash machines in Cyprus over the weekend, sparked big protests outside parliament and shook financial markets Monday.
Officials had made changes to the proposals to protect depositors with less than 20,000 euros in their accounts, but plans to levy a tax of 6.75% on deposits of 20,000-100,000 euros and 9.9% on anything above 100,000 euros proved unacceptable to parliament.
The party of President Nicos Anastasiades, who negotiated the deal with the EU, abstained.
Banks in Cyprus will remain closed until at least Thursday. Unable to function without the services of the banking sector, the Cyprus Stock Exchange has announced it will stay closed as well. ATMs were still functioning, according to CNN reporters.
The most controversial provision of the bailout was the tax on deposits, which are protected in Cyprus, as in the rest of the EU, to a level of 100,000 euros. As compensation, depositors would have been offered bank shares, underwritten by income from as-yet undeveloped natural gas deposits in Cypriot waters.
Cyprus was reluctant to increase the levy on larger amounts. It feared it would scare away international investors drawn by its low corporate tax rate and open economy -- in particular, Russians who hold as much as a third of the country's bank deposits.
The country first asked the EU for help last June. But talks were hampered by the reluctance of a previous government to accept terms, and also by EU concerns about money laundering.
Russia has come to Cyprus' aid in the past, providing a 2.5 billion euro loan in 2011 to shore up government finances. But its participation in the new rescue was looking uncertain after President Vladimir Putin attacked the tax on bank deposits as "unprofessional and dangerous".
A finance ministry spokesman said Russia was reviewing its position after not being consulted on the decision to impose the levy. Cypriot Finance Minister Michalis Sarris was traveling to Moscow for talks on Wednesday.
Cyprus is the fourth of 17 eurozone states to be granted a bailout by its EU partners and the IMF, after Greece, Ireland and Portugal. Spain has been given EU assistance to rescue its banks, but has so far avoided asking for a full sovereign bailout.
See also:
Ea O Ka Aina: Cyprus Seizure of Savings 3/18/13
.
1 comment :
The government Cyprus wanted to push a VAT to fix a bit of the deficits, but after the coalition began to crumble and great public antipathy towards such a plan became vociferously evident, the plan fell by the wayside.
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