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Cypriot citizens have condemned a deeply unpopular levy on domestic bank accounts, as part of the island's €10 billion bailout deal. Petros Karadjias/AP
Debt Crisis

Cyprus to exempt small savers from deposit tax ahead of crucial vote

Accounts with balances under €20,000 will be exempted from a controversial levy if it is approved by MPs today.

Updated, 11:23

THE GOVERNMENT of Cyprus has proposed to exempt certain bank accounts from a controversial levy that forms the backbone of a deal to secure a €10 billion European bailout, ahead of a major parliamentary vote to guarantee the deal.

MPs are due to vote at 6pm local time (4pm Irish time) on the bailout deal, which will see Eurozone countries offer €10 billion in emergency funding for the struggling island – with Cyprus due to come up with another €7 billion itself.

While about a fifth of the domestic amount is to be found by burning junior bondholders at the country’s main banks, €5.6 billion of the funding is to come from a deeply controversial one-off ‘stability levy’ – essentially a tax on the balances of bank accounts.

The original deal struck by EU ministers late on Friday night would see a tax of 6.75 per cent on bank accounts with balances of under €100,000, with the rate rising to 9.9 per cent for higher balances.

Because of the unprecedented nature of the charge, however – which has forced European authorities to insist that similar measures would not be applied in other bailed-out countries like Greece, Ireland or Portugal – talks are now continuing to restructure this leg of the deal.

This morning the government published draft legislation which provided an exemption for accounts under €20,000 – but did not increase the levy on higher accounts. The Wall Street Journal said this could mean a shortfall of €300 million in the final fundraising total.

‘More progressivity’ in controversial bank levy

Last night Jeroen Dijsselbloem, the Dutch finance minister who acts as the president of the ‘Eurogroup’ of Eurosone finance ministers, had said Cypriot authorities would introduce “more progressivity in the one-off levy” before it was presented to the parliament for its approval.

Reports this morning had touted two alternative models – one with a 3 per cent levy for balances under €100,000, 15 per cent for balances over €500,000, and 6.75 per cent for savers in between; the second with no levy at all on accounts under €100,000, and 15.6 per cent on balances over €500,000.

The levy is seen as a way of asking major Russian depositors – who regularly use Cyprus as an offshore banking venue – to contribute to saving the country’s banks, though the deal has been condemned by the Russian government which said it should have been consulted first.

From Russia with…

It is thought that the Cypriot government itself is keen to ensure that the levy applies to all account holders, and not just offshore depositors, in order to maintain good relations with Moscow – which is already a major lender to the Cypriot government, who had hoped for an improvement on the repayment conditions.

“The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution,” Dijsselbloem said in his statement last night.

The levy will be used to recapitalise the country’s two biggest banks, with shares given to account holders as compensation. The banks have faced capital shortages since the EU-approved partial default on Greek government debt last year.

An extraordinary bank holiday has been declared on the island for today, in order to ensure that banks remain closed while the measures are finalised. Yesterday was already a scheduled bank holiday, and banks themselves have been ordered not to open until Thursday to avoid a possible bank run.

Attention in the meantime turns to the parliament in Nicosia, where no party has a majority in the House of Representatives and where talks have been continuing to try and secure the support of smaller parties.

The vote had originally been due on Sunday evening, but had been delayed to yesterday and again to today so that Nicos Anastasiades – who only became president three weeks ago – could have more time to secure the necessary support.

Poll: Is Cyprus right to tax people’s savings?

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