By Nick Mann | 18 March 2013
Cyprus has no choice but to introduce a one-off tax on savings to help bail out the banking sector and stabilise the economy, president Nicos Anastasiades has claimed.
The levy is one of a series of proposed measures to raise the €10bn needed for bailout funds. The package was agreed by the Cypriot authorities, eurozone finance ministers and the International Monetary Fund on Friday but now needs the approval of the Cypriot Parliament, which is scheduled to vote on the issue tomorrow.
Under the proposal, a 6.75% tax would be charged on savings of less than €100,000 and 9.9% on those above that figure. Savers would be compensated with the equivalent amount in shares for the recapitalised banks.
Addressing the nation last night, Anastasiades said the tax option was better than the alternative on the table, which would eventually lead to the collapse of the country’s’ banking sector.
‘The first option was one that would lead to disorderly bankruptcy as a result of the decision of the European Central Bank to immediately discontinue the provision of emergency assistance to preserve the liquidity of the two large banks,’ he explained.
‘The second option is a very difficult but controllable and manageable condition that will eventually lead to the stabilisation of the economy and to recovery.’
He added: ‘Even if I fully disagree with specific provisions. I had to decide which of the two would have the least painful consequences and ensure the prospect of saving the island's economy.’
Anastasiades stressed that he would continue to ‘struggle’ to limit the impact of the levy on savers.
But Christopher T Mahoney, the former vice-chair of ratings agency Moody’s, warns in PF International today that the haircut on deposits showed Cyprus was the European Central Bank’s ‘new laboratory for monetary policy’.
‘The ECB has just transformed what had been money into a risk asset,’ he said. ‘The Fed did this same thing in 1931, and it didn’t work out well: the money supply flowed into mattresses. Going forward, only the truly patriotic will keep their money on deposit in Club Med banks.’
