Cyprus debates imposing bank deposit tax to bailout banks

Over the weekend, Cypriots were shocked to find that the government may impose a tax on all bank deposits as part of a bailout agreement with the International Monetary Fund (IMF). On Saturday, Cyprus agreed to a bailout of 10 billion euros ($13 billion) from its cohorts in Europe and the IMF in order to avoid insolvency and to save financial institutions.

In exchange for the bailout, Cyprus is mulling to impose a tax on all deposits. The banks will maintain a 6.75 percent tax on deposits under 100,000 euros ($130,000) and a 9.9 percent tax on those above. Banks have already taken action so that depositors can’t access their funds. The government claims that it has no other choice.

It is expected that such a levy would generate 5.8 billion euros ($7.49 billion) to recapitalize the banks and shore up the country’s debt, which is about 71.1 percent of the nation’s GDP ($16.42 billion).

Members of Parliament are now working on legislation that would put less of a burden on small savers by trying to implement a tax that leans more toward those with more than 100,000 euros ($130,000) – 12.5 percent for large deposits and 3.5 percent for small deposits. One proposal includes the introduction of a tax-free threshold, but there is no confirmation yet as to whether or not it will pass.

The parliamentary speaker said debate on the bank tax would be delayed until 12 p.m. EST on Tuesday.  Banks will be closed until Thursday and Monday is a holiday, reports Reuters. Depositors can still access their accounts through ATM machines, but no international transfers can be made until Tuesday.

Although customers can access their accounts, there have been widespread reports that banking machines are temporarily out of service, depositors can withdraw only a certain amount and there are long wait times.

“I completely share the unpleasant sentiment that this difficult and onerous decision has caused. That’s why I continue to give battle so that the decisions of the eurozone are amended in the next hours to limit the effect on small depositors,” said Cyprus President Nicos Anastasiades in a televised address “This solution is certainly not the one we would have wanted, but it is the least painful under the circumstances, because above all it leaves the operation of this country in our hands.”

He added that if he hadn’t agreed to the conditions of the bailout then the banking system would collapse, thousands of small businesses would go bankrupt, thousands of job losses and the country would be forced to exit the euro.

This could hurt future deposits as Cypriots may find new means of storing their wealth, such as the mattress, bullion and even bitcoins.

Officials in Italy and Spain attempted to reassure the public over the weekend by insisting that the situation in Cyprus is a new one. They added that their savings deposits would remain safe. Some experts are calling for similar measures, though.

Joerg Kraemer, chief economist of the German Commerzbank, told Handelsblatt that taxes on private savings accounts in Italy would help the nation’s finances. “A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product.”

Cyprus has received staunch criticism, especially from Russian President Vladimir Putin. He disparaged the bank tax, which could cost Russian financial institutions as much as $2 billion, as “unfair” and “dangerous.”

Russian Prime Minister Dmitry Medvedev noted that Russia should modify its positions on the island nation. “Let’s put it straight, it just looks like confiscation of someone else’s money. I don’t know who is the author of this idea, but it looks that way.”

Cyprus is trying to encourage Russia to a five-year extension on its repayment of a 2.5 billion euro ($3.26 billion) loan from 2011. However, Russian Finance Minister Anton Siluanov stated on Monday that the proposal would initiate a review on its positions on loans to the country. Cyprus Finance Minister Michalis Sarris is expected to visit Moscow no earlier than Wednesday, according to the Wall Street Journal.

It appears that the chaos in Cyprus is causing fear in stock markets worldwide. Many shares of Europe’s largest financial institutions were plummeting Monday: Shares of Barclays dropped 4.9 percent, while shares in Deutsche Bank fell 3.3 percent.

This article was updated on Monday, Mar. 18, 2013 at 2:05 p.m. to reflect that it has been announced that Cyprus financial institutions will be closed until Thursday as government officials debate over the bank deposit tax.

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