Monday

26th Feb 2024

Cyprus blamed for decision to tax small savers

  • Cypriot President Anastasiades (l) insisted that big savers should not to be hit too hard, the commission says (Photo: Council of European Union)

The European Commission on Wednesday (21 March) said Cyprus itself was responsible for the most unpopular detail of its bailout.

Following the Cypriot parliament's rejection of the €10 billion bailout, the commission said it was Nicosia that wanted to apply a levy on all savers - including the least well off - when the terms of the deal were being discussed.

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It is this element that sparked Cypriots to queue to take money out of their accounts and led to fears of a bank run that could spread to other vulnerable periphery euro countries.

"The commission made it clear ... that an alternative solution respecting the financing parameters would be acceptable, preferably without a levy on deposits below €100.000. The Cypriot authorities did not accept such an alternative scenario."

It said it is now up to Cyprus to find "alternative solutions” to raise the €5.8 billion that its creditors want from the island itself.

In Berlin, the German government was busy outing Cyprus' role too.

"The way the levy is structured was not something the Eurogroup or the German government imposed on Cyprus, it was a decision by the Cypriot government. They did not want to have depositors above €100,000 pay too much," government spokesperson Steffen Seibert said Wednesday.

It follows several comments by finance minister Wolfgang Schaeuble that Cyprus was keen to maintain its business model as a low tax, financial centre.

During the bailout discussions on Friday, Cypriot leader Nicos Anastasiades baulked at taxing larger deposit holders, including many wealthy Russians, at anything higher than 10 percent.

The end solution was to tax all savers: a compulsory levy of 6.75 percent on deposits under €100,000 and a 9.9 percent tariff on savings over €100,000.

A last minute tweak to exempt those with less than €20,000 savings was not enough to avoid the entire bailout package being voted down.

The events mark an extraordinary few days of blame and counterblame as individual EU politicians refuse to accept accountability for the original package.

Meanwhile the decision-making trail, despite the commission’s statement putting the blame at Nicosia's door, remains muddy.

According to one EU source, the commission sided with Cyprus when Nicosia refused to accept an original German proposal called a "bail-in," in which only the two largest banks - Laiki and Bank of Cyprus - would have been "considerably restructured," meaning losses for depositors and bondholders alike.

But under that proposal, depositors under €100,000 would not have been hit.

“We don’t really understand why the commission opposed this,” the source said.

The same source also indicated the commission was in agreement with Cyprus when it suggested taxing all savers with a one-off levy in all Cypriot banks.

The commission, for its part, said that not all “elements” of the bailout correspond to its “proposals and preferences.”

But it added that it was not EU economics commissioner Olli Rehn’s “responsibility to start putting down reservations when everyone else is in agreement.”

Meanwhile, German foreign minister Guido Westerwelle told press in Berlin on Wednesday that there is no point in blaming "one person, one institution or one country" for the levy.

He added: "But I already said at the weekend that I am sceptical about the involvement of small savers because it can hit the wrong people."

For now, the status of the bailout is in limbo.

It is unclear when Cypriot banks will re-open and how long the European Central Bank will keep up an emergency-lending scheme for Laiki and the Bank of Cyprus in the absence of a bailout deal. The absolute deadline for a revised bailout is 3 June, when €1.42 billion in government bonds falls due.

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