Cyprus and Creditors at Odds as Europe Seeks to Contain Damage

Barry Randall
20 Mar, 2013
New York City

Cyprus Parliament struck down the proposal to tax depositors and international creditors looked for alternatives to stem the growing debt crisis. Cyprus ministers looked to Russia for emergency help and European regulators debated the fate of bailout as the banking system in Cyprus remains closed.

[R][7:00 PM Frankfurt – Cyprus Parliament struck down the proposal to tax depositors and international creditors looked for alternatives to stem the growing debt crisis. Cyprus ministers looked to Russia for emergency help and European regulators debated the fate of bailout as the banking system in Cyprus remains closed.[/R]

Cyprus Parliament struck down the proposal to impose a one-time tax on bank depositors as a part of bank bailout.

The lawmakers were unanimous in their rejection and are now scrambling to raise need capital to shore up the banking system that remains closed for now.

The government has prolonged the five-day bank holiday and the closure is expected to last at least till next Monday but automated teller machines are open for withdrawals.

There are several proposals floating around but none appear to meet all the demands placed by the troika of lenders.

Cypriot citizens were outraged and many bank depositors watched nervously in Spain, Portugal, Italy and Russia as the events unfold in Cyprus and negotiations kick in high gear.

Bank depositors were led to believe by the European Central Bank that accounts with less than 100,000 euros are insured against all losses.

The proposal to tax bank depositors has set a dangerous precedent in the euro zone with unknown consequences and shaken the faith in the European banking system.

What was once unthinkable is now becoming worrisome to many bank depositors in the heavily indebted nations of the euro zone.

The lawmakers in Cyprus worked on a revised proposal to tax 2% on insured deposits up to 100,000 euros, and tax 5% on larger accounts. The fate of the measure is not clear as lawmakers are still not sure if the measure will be accepted in the Parliament.

Cyprus is also looking to close and merge two of its largest banks Laiki Bank and Bank of Cyprus PCL and separate the bad assets from the good one. The combined good assets of two banks then can be sold to international bank looking to get a foothold in Cyprus.

Several Russian banks are said to be interested in such a bank but none has publicly confirmed the interest so far.

But that still leads to the question, what will happen to the bad assets and who will be responsible for these assets and how these losses will be repaid.

In another proposal, government is said to work on nationalizing pension plan assets and use that as collateral to float new sovereign bonds. This will soften the total tax that needs to be collected from depositors.

However, Cyprus has 17.4% unemployment rate and the government is heavily indebted and international lenders are not keen on raising the debt burden on this island nation.

While the negotiations are going on between the President Nicos Anastasiades’ office and with the officials of European Central Bank, the International Monetary Fund and European Commission; ministers are also engaging Russia.

Today, Michalis Sarris, Finance Minister met with his Russian counterpart, Anton G. Siluanov at his office in Moscow and later in the afternoon with a deputy prime minister, Igor I. Shuvalov.

Mr Sarris said after the early morning meeting, “We underscored how difficult the situation is, and we will continue our discussion to find a solution by which we hope we will be getting some support from Russia.”

Cyprus is seeking to defer the payment of 2.5 billion euros loans and additional loans of 5 billion euros at cheaper interest rates from Russia.

There was a widespread speculation in Russian and Cypriot media that the island nation may consider granting access to offshore natural gas field locations after the energy minister Georgios Lakkotrypis was also in Moscow on Wednesday.

Separately, the head of the Church of Cyprus also chimed in the debate and said he is prepared to help the nation in the time of the crisis.

Archbishop Chrysostomos II said on television that the church is prepared to put all of its real estate and other financial assets as collateral so that the nation could issue fresh sovereign bonds and raise the much needed cash.

The church is one of the largest stake holders in the largest bank, Bank of Cyprus and is the largest shareholder in the third largest Hellenic Bank on the island.

Earlier on Tuesday, Deputy Governor of the Cyprus central bank said if banks were open on Thursday, about 10% of the deposits are likely to leave the banking system immediately.

However, that estimate may prove to be too optimistic after five days of inconclusive talks.

The solution demanded by European lenders and central bank has set off a dangerous precedent in the euro zone and in the time of crisis no depositor is safe as the authorities are prepared to tax depositors despite the prior assurances and guarantees otherwise.

“How can you trust these European bureaucrats? If they are prepared to tax depositors in Cyprus, maybe we are next in line,” said Luciano Salvatore, a retired 76 year old telecommunication worker in Milan after withdrawing most of his money at Banca UniCredit in Milan.