Government of Cyprus Suggests Deposit Tax to Partially Finance Bailout Package

March 18, 2013

The Cyprus government announced Saturday that in conjunction with a European Union (EU) bailout package under consideration, depositors within the country would be forced to pay taxes on accounts held in Cypriot banks. Accounts under €100,000 would be subject to a 6.75 percent levy, while accounts in excess of €100,000 would be required to forego 9.9 percent. As expected, citizens of Cyprus depleted ATM machines over the weekend in anticipation of the tax, even though “funds to pay the levy were frozen in accounts immediately” and electronic transferring abilities were halted.

The proposal has been dubbed a “stability tax” and is expected to be levied on Tuesday when banks reopen after a Monday bank holiday. The Cyprus government has yet to approve the proposal despite the fact that the vote was scheduled for Sunday; reports suggested the vote may even be cancelled altogether. Effects of failure to come to a bailout agreement may not be limited to the small country. If the bailout-tax package fails to receive parliamentary approval, there is worry that “the country of just a million people [face] bankruptcy and potentially an exit from the euro—a development that could have huge ramifications in global financial markets.” The euro and other European stocks have already fallen sharply in response to the news.

The Huffington Post reported that this “marks the first time the 17 eurozone countries and the IMF have dipped into people’s savings to finance a bailout.” Such a bold move not only threatens confidence in the banking and financial system, it discourages people from saving. According to the Boston Herald, “Now investors are worried that savers will start taking their money out of banks across Europe—just like Cyprus residents did on a weekend ATM bank run.”

Despite the fact that the Cyprus financial sector holds significant capital from Russian investors, the deposit tax will also hit ordinary citizens. The vote’s delay is thought to be in response to these concerns—the President of Cyprus has reportedly been working on a plan that would limit the impact on smaller accounts. Whether or not such a measure reaches a parliamentary vote is unimportant—the EU leadership has made it clear that they are willing let depositors, not just bondholders, bear part of the burden of a financial bailout.

Follow Liz on Twitter @elizabeth_malm.


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