Eurozone finance ministers last night urged Cyprus to protect small savers’ deposits while still coming up with €5.8 billion from a deposit levy so the island’s €10 billion bailout could go ahead.
The Eurogroup appeared to show flexibility on the details of how Cyprus should implement the unprecedented haircut on bank deposits, following the backlash created by its decision last Saturday to take 6.75 per cent from insured depositors with under €100,000 in a Cyprus-based bank, and 9.9 per cent from deposits over that amount.
The Cyprus deal had a negative effect on financial markets yesterday, with shares, the euro and the bonds of southern eurozone countries sliding.
Uncertainty reigned as a Cypriot parliamentary vote on Saturday’s deal was postponed twice- from Sunday to Monday and then to Tuesday- with the government nowhere near certain of winning a majority vote.
The ongoing confusion led the Central Bank to announce yesterday that all banks will be closed today and tomorrow, doubtless in a move to avoid a run on bank deposits.
Ahead of a plenary session in the legislature, scheduled for 6pm today, the eurozone’s finance ministers held a teleconference call for one and a half hours last night to take a second look at their initial decision.
According to Reuters, the EU finance ministers said they favoured a higher, 15.6% hit for richer savers so more modest accounts could be spared.
Various reports suggest it was exactly this kind of deal that the Cypriot delegation in Brussels rejected at the weekend, fearing the destruction of their banking model which lures money from rich Russians and others.
It was not clear if Nicosia will accept it now but if it does, it would still need to raise €5.8 billion from the bank levy as planned, a Greek finance ministry source said, as well as get the levy passed through parliament.
“All Eurogroup ministers said (last night) they wished there was no tax below €100,000 but you can’t force a country to not do that,” the Greek source told Reuters.
“Cyprus doesn’t want to impose a large tax above €100,000 because the money will flow out. Two thirds of deposits are from abroad,” he added.
Eurogroup President Jeroen Dijsselbloem released a statement after the teleconference recalling that the weekend’s controversial decision was the product of “consensus” between the Cypriot government and the Eurogroup”.
He reiterated that the stability levy on deposits is a “one-off measure” to restore the viability of the Cypriot banking system and safeguard financial stability in Cyprus, adding that without it, deposit holders would be “significantly worse off”.
“The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below €100,000,” he said.
Dijsselbloem said the Cypriot authorities “will introduce more progressivity in the one-off levy compared to what was agreed” last Saturday, provided that it still raises the €5.8 billion demanded to release the €10bn rescue package.
It has emerged the UN Envoy Alexander Downer would also be affected by the levy, if conditions remain unchanged. He confirmed that he had deposits in a Cyprus bank, although declined to say how much, only that it was under €100,000. While not claiming to be an expert on economic matters, he supported the decision to issue the levy; saying that he would rather lose 6.75% of his deposit than lose the whole sum should the bank collapse.