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Bank deposit levy rejected by Cyprus MPs
Prior to the last week, the word ‘Cyprus’ probably conjured up images of an idyllic holiday destination in the Mediterranean or, at a push if you’re a football fan, APOEL Nicosia’s heroic run to the Champions League quarter final last year. This week however, it has become associated with one thing and one thing only: a bank deposit levy.
As part of a €10bn bailout package agreed in Brussels, a one-off tax on savings was to be levied, but the plan was today left in tatters as MPs voted against the bill. In fact, not a single Cypriot MP voted in favour of the bill with 36 voting against and 19 abstaining. The original plan proposed a 6.75% levy on all deposits. This was changed to exclude savers with less than €20,000 and an increase to 9.9% on all savings was also introduced to the proposal. However, it was not enough to appease those voting on the bill and Cyprus is now left in what BBC journalist Robert Peston referred to as a ‘an astonishing mess.’
So, what happens now?
Cypriot President Nicos Anastasiades warned before the vote that failure to agree a bailout could lead to the government becoming insolvent, a collapse in the banking sector and the country being forced to exit the euro.
President Anastasiades also warned that if a deal was not agreed, the European Central Bank (ECB) could potentially pull the plug on the emergency funding that is currently keeping Cyprus’s two biggest banks (Cyprus Popular Bank and Bank of Cyprus) in business.
This would be disastrous for a country which is reliant on the services sector for over 80% of its Gross Domestic Product (GDP) and so a more likely outcome is that the Cypriot government will return to Brussels cap in hand and ask for a more generous deal, i.e. one which does not involve taxing citizens’ savings. After all, how easy would it be for them to force bailout-mandated austerity measures on a public fuming at a ‘savings tax’?
Although the risk of contagion throughout the Eurozone is deemed to be low, the ongoing saga, which has seen Cypriot banks closed for the last two days, has left an unsavory taste in the mouths of many. The likes of Greece, Ireland and Portugal were bailed out on much more generous terms, but one must now wonder if this new hardline stance, driven by anti-bailout sentiment in creditor countries like Germany, will be the stance should any other Eurozone country require a bailout. Only time will tell.
For a more in-depth understanding of Cyprus, check out our Country Analysis Report: Cyprus, PEST Insights