Cyprus bank account tax puts Europe on edge
Officials fear bank run as citizens angered by levy in EU/IMF rescue package
Posted: Mar 18, 2013 6:56 AM ET
Last Updated: Mar 18, 2013 9:59 PM ET
A plan to seize up to 10 per cent of savings accounts in Cyprus to help pay for a €15.8 billion financial bailout was met with fury Monday, and the government shut down banks until later this week while lawmakers wrangled over how to keep the island nation from bankruptcy.
Though the euro and stock prices of European banks fell, global financial markets largely remained calm, and there was little sense that bank account holders elsewhere across the continent faced similar risk.
Political leaders in Cyprus scrambled to devise a new plan that would not be so burdensome for people with less than €100,000 in the bank.
The authorities delayed a parliamentary vote on the seizure of €5.8 billion and ordered banks to remain shut until Thursday while they try to modify the deal, which must be approved by other eurozone governments. Once a deal is in place, they will be ready to lend Cyprus €10 billion in rescue loans.
A rejection of the package could see the country go bankrupt and possibly drop out of the euro currency — an outcome that would be even more damaging to financial markets' confidence.
Even while playing down the chance of fresh market turmoil, experts warned that the surprise move broke an important taboo against making depositors pay for Europe's bailouts. As a result, it may have longer-term consequences for confidence in Europe's banking system — and its ability to end its financial crisis.
'Their money in every bank is not safe.'—Cypriot Lawyer Simos Angelides
"It's a precedent for all European countries. Their money in every bank is not safe," said lawyer Simos Angelides at an angry protest outside parliament in Cyprus' capital, Nicosia, where people chanted, "Thieves, thieves!"
Eurozone finance ministers held a telephone conference Monday night, and concluded that small depositors should not be hit as hard as others. They said the Cypriot authorities will stagger the deposit seizures more, but they remained firm in demanding that the overall sum of money raised by the seizures remain the same.
In the short term, there was little sign of a new explosion in the European financial crisis. Stock markets dropped in early hours but stabilized by the close. The Dow Jones industrial average fell 62.05 points, or 0.4 per cent, to 14,452.06 Monday. The euro fell 0.6 per cent — a bad day, but hardly a token of impending doom. Government bond prices for Italy and Spain were roughly unchanged, suggesting that investors do not expect the market trouble to spread beyond Cyprus for now.
In part, that may be due to the fact that Cyprus' case is by many measures an exception.
The decision to hit deposits up to €100,000 — the deposit insurance limit in Cyprus — with a 6.75 per cent tax and those above that with a 9.9 per cent tax was dictated partly by the unusual qualities of the country's financial system.
Cyprus, with only 0.2 per cent of the eurozone economy, has a bloated banking system seven times the size of the island's economy. Losses on Greek government bonds had crippled Cypriot banks and required government money to bail them out. Meanwhile, a large proportion of deposits — 37 per cent — come from people outside Cyprus and the European Union, much of it from Russia.
European leaders wanted to limit the size of the rescue loans — which are backed by European taxpayers — to €10 billion. Leaders were also reluctant to bail out Russian depositors whose funds may be the result of tax evasion, crime or money laundering.With files from The Associated Press
Top News Headlines
- Obesity now recognized as a disease
- The American Medical Association has voted to recognize obesity as a disease, while doctors in Canada say they also treat it as such. more »
- B.C. First Nation sets fires to save bison
- A First Nation band is reviving the age-old practice of controlled burning in order to improve the health of forests and restore the population of the wood bison in a corner of northeastern B.C. more »
- 1 in 8 bird species threatened with extinction
- One in eight bird species worldwide faces the threat of extinction, according to a report released by Birdlife International. more »
- Canada buys rare War of 1812 collection for $573K
- The government of Canada was the winning bidder for a large collection of letters, maps and other papers that once belonged to Sir John Sherbrooke, the lieutenant-governor of Nova Scotia who conquered Maine for the British during the War of 1812. The collection sold for $573,000 at auction in London. more »
Latest Business Headlines
- Orascom withdraws bid for control of Wind Mobile
- Orascom Telecom Holding has announced it is pulling back its bid to buy out Wind Mobile Canada founder and CEO Anthony Lacavera and acquire full control of the company, in which it already holds a 65 per cent interest. more »
- Poloz urges 'stability and patience' in 1st public speech
- In his first public remarks since being named governor of the Bank of Canada, Stephen Poloz said the central bank will keep its focus trained squarely on keeping inflation in check. more »
- World's wealthy richer than ever
- The investable wealth of the world's richest people reached a record high of $46.2 trillion US in 2012, a report by RBC Wealth Management and the consulting firm Capgemini has found. more »
- Talking Keystone, Redford says Canada and U.S. share energy values
- Alberta Premier Alison Redford says the United States and Canada share political and environmental values and must work together to become energy independent of those who do not. more »
Lang & O'Leary Exchange
The data on this site is informational only and may be delayed; it is not intended as trading or investment advice and you should not rely on it as such.
- Sopranos star James Gandolfini dies in Italy
- Bob Rae quits as MP in 'very emotional' decision
- Wearing a mask at a riot is now a crime
- 2 men jailed in Dominican wedding fight back in Canada
- B.C. teacher duct-taped students' mouths
- Obesity now recognized as a disease
- Dozens of children seized from Manitoba Mennonite community
- Half of First Nations children live in poverty
- Huge ancient city at Angkor Wat revealed by lasers