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Cyprus Rejects Bailout Deal, Bank Tax

  • VOA News

Protesters stand during parliamentary vote on a bank tax plan March 19, 2013 in Nicosia

Protesters stand during parliamentary vote on a bank tax plan March 19, 2013 in Nicosia

The Cypriot parliament has overwhelmingly rejected a bailout plan demanded by international lenders that would have taxed the savings accounts of depositors at the island nation's banks.

No lawmaker voted in favor of the $13 billion rescue package Tuesday night, with 36 voting against it and 19 abstaining.

The vote left the fate of the bailout in question and raised the possibility that the Cypriot government could default on its financial obligations or even end its membership in the 17-nation euro currency union. Cyprus, a longtime offshore tax haven, had sought to use much of the bailout to refund its beleaguered banks that have been weighed down with losses from bad loans.

But the bailout terms - set by the International Monetary Fund, the European Central Bank and Cyprus' eurozone neighbors - called for the tiny country to impose what they said was a one-time tax on bank deposits, nearly 10 percent on the largest accounts above $130,000.

The proposal drew the immediate ire of Cypriots, as well as Russian President Vladimir Putin. Russian oligarchs have vast sums parked in Cypriot accounts.

Cypriot President Nicos Anastasiades, who won election last month, has predicted earlier that parliament would reject the bailout deal because it was "against the interests" of the country. Asked what alternative plan he might have, Mr. Anastasiades said, without elaborating, "We have our own plans."

One international economics expert, Andreas Hauskrecht of the Indiana University business school, told VOA he thinks Cyprus will default on its obligations if a bailout plan is not approved.

“Taxing deposits is not a very smart idea. This is where the whole mess started. And if they don’t get the third plan, the compromise, through parliament, I actually don’t see how the Europeans can continue with the bailout without completely losing credibility. In Europe, you can’t rule out anything, but I think then a default is likely,” Hauskrecht said.

The deal with the lenders called for the tax on savings accounts to contribute $7.5 billion toward the country's bailout. Cypriot lawmakers discussed revising the tax to eliminate the tax on accounts with less than $25,000. But that plan would have fallen short of the $7.5 billion demanded by the country's lenders.

Cypriot banks are closed until Thursday to keep panicked investors from withdrawing their cash.

One Russian economist, Renaissance Capital's Ivan Tchakarov, said his country's depositors never envisioned that their savings would be taxed in Cyprus.

"There has been this kind of unwritten contract between the Russian depositors who have placed money in Cyprus and the Russian government, that it's actually safe for us to put money there, because there's a very strong relationship between Cyprus and Russia. We know that our government has extended loans to Cyprus. We never thought that such a thing might happen. So I think this contract has been violated and I think it will be more challenging for a political establishment here in Russia to deal with this issue,'' Tchakkarov said.

The Cypriot economy accounts for only a very small fraction of the eurozone's economic fortunes, but none of the previous bailouts for Greece, Portugal, Ireland and the Spanish banking system has taxed savings. Some analysts said they fear that taxing deposits in Cyprus could set a precedent that might be followed in other debt-ridden countries in the union and ignite a run on banks to withdraw money.

Hauskrecht said Europe's fear of economic calamity is the driving force for a Cyprus bailout.

"Overwhelmingly, European leaders fear that if Cyprus hits the wall we will have immediate effects on Greece, Portugal, etc. etc. And that’s the reason for the bailout package," Hauskrecht said.

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