Cyprus’s Parliament has postponed until today an emergency session to vote on a levy on bank deposits after signs that lawmakers might block the surprise move agreed in Brussels to help fund a bailout and avert national bankruptcy.
In a radical departure from previous aid packages, eurozone finance ministers want Cyprus savers to forfeit up to 9.9 per cent of their deposits in return for a €10 billion bailout to the island, which has been financially crippled by its exposure to neighbouring Greece.
The decision, announced on Saturday morning, stunned Cypriots and caused a run on cashpoints, most of which were depleted within hours. Electronic transfers were stopped.
The move to take a percentage of deposits, which could raise almost €6 billion, must be ratified by Parliament, where no party has a majority. If it fails to do so, President Nicos Anastasiades has warned, Cyprus’s two largest banks will collapse.
One bank, the Cyprus Popular Bank, could have its emergency liquidity assistance (ELA) funding from the European Central Bank cut by March 21.
A default in Cyprus could unravel investor confidence in the eurozone, undoing the improvements fostered by the European Central Bank’s promise last year to do whatever it takes to shore up the currency bloc.
A meeting of Parliament scheduled for 2pm yesterday was postponed for a day to give more time for consultations and broker a deal, political sources said. The levy was scheduled to come into force tomorrow, after a bank holiday today. Making bank depositors bear some of the costs of a bailout had been taboo in Europe, but eurozone officials said it was the only way to salvage Cyprus’s financial sector, which is around eight times the size of the economy.
European officials said it would not set a precedent.
In Spain, one of four other states getting eurozone help and seen as a possible candidate for a sovereign rescue, officials were quick to say Cyprus was a unique case. A Bank of Spain spokesman said there had been no sign of deposit flight.
The crisis is unprecedented in the history of the Mediterranean island, which suffered a war and ethnic split in 1974 in which a quarter of its population was internally displaced.
Anastasiades, elected only three weeks ago, said he had no choice but to accept the eurozone’s aid terms. “We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” Anastasiades said in a statement.
With a gross domestic product of barely 0.2 per cent of the bloc’s overall output, Cyprus applied for financial aid last June, but negotiations were stalled by the complexity of the deal and the reluctance of the island’s previous president to sign.
International Monetary Fund managing director Christine Lagarde, who attended the meeting, said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.
The proposed levies on deposits are 9.9 per cent for those exceeding €100,000 and 6.7 per cent on anything below that.
They would be compensated with shares in the banks. A political source told Reuters that, as a sweetener, Anastasiades would offer depositors equity returns, guaranteed by future natural gas revenues.
“Half of the value of the haircut will be guaranteed by natural gas proceeds,” the source told Reuters.
Cyprus is expecting the results of an offshore appraisal drilling this year to confirm the island is sitting on vast amounts of natural gas worth billions.
According to a draft copy of legislation, failing to hand over the levy would be a criminal offence liable to three years in jail or a €50,000 fine.
Those affected will include rich Russians with deposits in Cyprus and Europeans who have retired to the island, as well as Cypriots themselves.