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Associated Press
President Nicos Anastasiades, left, and chief legislator Yiannakis Omirou leave a meeting on the deposit tax Monday in Nicosia, Cyprus.

Money in the bank not safe in Cyprus

Broke government aims to tax deposits

– A plan to seize up to 10 percent of savings accounts in Cyprus to help pay for a $20 billion financial bailout was met with fury Monday, and the government shut down banks while lawmakers wrangled over how to keep the island nation from bankruptcy.

Experts warned that the surprise move broke an important taboo against making depositors pay for Europe’s bailouts. It may have longer-term consequences for confidence in Europe’s banking system – and its ability to end its financial crisis.

“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!”

Political leaders in Cyprus scrambled to devise a new plan that would be less burdensome for those with smaller deposits Once a deal is in place, other eurozone governments will be ready to extend rescue loans to Cyprus. Without them, the country could go bankrupt and drop out of the euro currency.

Eurozone finance ministers held a telephone conference Monday night and concluded that small depositors should not be hit as hard as others, but they remained firm in demanding that the overall sum raised by the seizures remain the same.

The decision to hit deposits up to $129,290 – the deposit insurance limit in Cyprus – with a 6.75 percent tax and those above that with a 9.9 percent tax was dictated partly by the unusual qualities of the country’s financial system.

Cyprus, with only 0.2 percent 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.

A large portion of deposits – 37 percent – come from people outside Cyprus and the European Union, much of it from Russia. European leaders were reluctant to loan Cyprus money to refill its coffers after it bailed out Russian depositors whose funds may be the result of tax evasion, crime or money laundering.

Dario Perkins, an analyst at Lombard Street Research, noted that “the German government couldn’t be seen bailing out Russian mafiosi just before an election.”

He said the bailout also showed that European leaders were willing to decisively confront Cyprus’ problem – rather than postponing the day of reckoning with a partial solution.

“On one level, you could argue this deal is good news,” Perkins wrote in a note to investors.

Officials say that by tapping the depositors, they are reducing the total amount of debt taken on by the government, keeping it to a high but manageable 100 percent of GDP by 2020.

That will mean less-painful austerity cutbacks than those that were imposed on Greece as a condition of its loans. Partly as a result, Greece is in the sixth year of recession.

But down the road, the Cyprus precedent, even if quickly reversed, could come back to haunt eurozone policy makers by making depositors less sure about the safety of their money in case of trouble. It could also complicate creation of an EU-wide system of bank deposit insurance, part of long-term efforts to create a more robust financial system and prevent future crises.

“The damage is done,” said Louise Cooper, who heads financial research firm CooperCity in London. “Europeans now know that their savings could be used to bail out banks.”