I call that outright THEFT!
– Depositors Pay Price in Cyprus Bailout Deal (Wall Street Journal, March 16, 2013):
BRUSSELS—Depositors in Cypriot banks will be hit with a one-off tax on their savings, as part of a €10 billion ($12.96 billion) bailout for the Mediterranean island from the euro zone and the International Monetary Fund.
The deal, announced early Saturday, marks the first time in the euro zone’s five-year-old financial crisis that depositors in bloc’s banks will lose money. Accounts with more than €100,000 will be taxed at 9.9%, those with less at 6.75%, raising an expected €5.8 billion for the near-bankrupt nation.
“This decision should not be compared to the ideal, but to the very real possibility that much more money could have been lost in bankruptcy of the banking system or indeed of the country,” Cypriot Finance Minister Michalis Sarris told reporters, looking strained after 10 hours of often-fraught negotiations.
Mr. Sarris said the Cypriot Parliament would adopt the taxes over the weekend and the money would be extracted from accounts before banks take up business Tuesday. Monday is a public holiday.
“We have taken immediate measures so that electronic transfers cannot take effect before banks reopen on Tuesday,” said the minister, who took office just two weeks ago.
Jörg Asmussen, a member of the executive board of the European Central Bank, stressed that amounts in excess of the levy will remain fully available. Accounts held in Greek offshoots of Cypriot banks will also be spared.
Cyprus, which first applied for help last summer, has proved a major headache for the euro zone, mostly because of an outsized banking sector, which has swelled to eight times the size of the island’s economy and was hit hard by a restructuring of Greek government debt last year. Allegations of money laundering and a general election in February also hampered bailout talks.
An initial assessment of Cyprus’s finances in January concluded it needed more than €17 billion, including €10 billion just to stabilize its banks. That would have been an unmanageable burden for the island, whose annual economic output is less than €18 billion and shrinking.
IMF Managing Director Christine Lagarde and Mr. Sarris before Friday’s meeting, which ended with a deal to tax depositors in Cypriot banks
As they struggled to bring down the rescue costs, euro-zone finance ministers and the troika of the European Commission, the ECB and the IMF chose to go ahead with the deposit tax despite warnings it could unsettle savers and investors in other weak European countries.
“This is a special situation, with a very specific banking sector, with a very specific structure and size, which calls for this specific package,” said Jeroen Dijsselbloem, the Dutch finance minister who chaired the discussions. He said similar measures weren’t being considered for other countries that have received bailouts.
Officials hoped that the contribution of depositors will make it easier to pass the rescue package through parliaments in rich countries like Germany, the Netherlands and Finland. Lawmakers there have balked at bailing out foreign depositors, many of them Russians, whom they suspected of taking advantage of Cyprus’s lax banking laws.
Nicosia will also raise its corporate-tax rate to 12.5% from 10%, among the euro zone’s lowest, impose a levy on interest income and undergo a review of its anti-money-laundering legislation.
The IMF, which had been the strongest advocate for having the bailout burden fall partly on depositors, will contribute to the rescue, said the fund’s Managing Director Christine Lagarde. Two officials said the IMF is expected to chip in €1 billion of the overall €10 billion needed.
Olli Rehn, the European Union’s economic affairs commissioner, said Russia had indicated it was willing to give Cyprus more time to repay a €2.5 billion rescue loan from 2011, and may also lower the interest it charges. Mr. Sarris is expected to travel to Moscow on Wednesday to nail down the final terms.
The struggle to agree on a bailout for tiny Cyprus, which accounts for just 0.2% of the euro zone’s economy, once again underlines how vulnerable the currency union remains to economic shocks in any member nation.
“Cyprus is of systemic relevance to the euro area,” said Mr. Rehn. “Not to provide assistance to Cyprus would have posed a risk of undoing the progress that has been painstakingly made over the past year.”
Ministers also agreed to give Portugal and Ireland more time to repay their bailout loans, but didn’t provide any details.