Eurozone urges Cyprus to spare smaller deposits

NICOSIA/ATHENS — Eurozone ministers urged Cyprus to let smaller savers escape a levy on bank deposits, before a crucial debate and parliamentary vote later today that will either secure the island’s financial rescue or threaten default.

A weekend announcement that Cyprus would impose a levy on bank accounts as part of a 10-billion-euro (US$13 billion) bailout by the European Union broke with previous practice that depositors’ savings were sacrosanct.

The euro and stock markets fell on concern that developments in Cyprus could reignite the financial crisis in the 17-nation euro zone, while angry Cypriots staged protests outside their heavily guarded Parliament.

Before today’s vote, which is too close to call and will carry reverberations across the currency area if lost, eurozone finance ministers held an evening teleconference and said depositors with less than 100,000 euros should be protected, officials said.

Under the deal struck in Brussels at the weekend, bank deposits under that level will face a levy of 6.7 percent, ripping up the protection savers thought they enjoyed on insured deposits up to that limit, while those above would be stung for 9.9 percent. The finance ministers said they favoured a higher, 15.6 percent hit for richer savers, so more modest accounts could be spared.

That would look similar to a deal the Cypriots, fearing the destruction of their banking model which lures money from rich Russians and others, balked at in Brussels. It was not clear if Nicosia will accept the deal now but if it does, it would still raise 5.8 billion euros from the bank levy as planned, a Greek Finance Ministry source said.

The decision to target bank accounts stunned Cypriots, and police sealed off Parliament as about 400 people staged a noisy protest outside, aggrieved that their small island of one million people should be singled out for such treatment.

Demonstrators honked horns and waved placards reading “Hang the Banksters, Hands off People’s Savings” and”Merkel go home and stay.”

Cyprus’ parliamentary speaker said yesterday the debate on the bank levy would be delayed until 4pm today to buy more time to build consensus. Banks, which were shut yesterday for a bank holiday, will remain closed today and tomorrow to avert panic.

Approval for the levy in Cyprus’s 56-member Parliament is far from a given: no party has an absolute majority and three parties say outright they will not back the tax.

President Vladimir Putin criticised the bank levy yesterday as setting a dangerous precedent.

“Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous,” Kremlin spokesman Dmitry Peskov told reporters.

Cypriot President Nicos Anastasiades, a conservative elected just three weeks ago, said the tax was an alternative to a disorderly bankruptcy. It was painful, but “will eventually stabilize the economy and lead it to recovery,” he said.

Global stock markets fell yesterday as concerns over European sovereign debt returned to the forefront.

Stock markets in the US, Asia and Europe all dropped in early trading, though some of the losses were recovered later in the day. The euro also fell agsinst the dollar to $1.2948.

Herald with AP-Reuters