Plan to seize 10pc of all deposits in Cyprus banks threatens to derail bailout
EUROPE is braced for renewed turmoil as outrage in Cyprus over an unprecedented levy on bank deposits threatened to derail the nation's bailout and spark a new round in the debt crisis.
Cypriot President Nicos Anastasiades, who bowed to demands by euro-area finance ministers to raise €5.8bn by taking a piece of every bank account in Cyprus, delayed a parliamentary vote to pass the measure until today despite pressure from the European Central Bank (ECB) to take the vote yesterday.
The levy was due to come into force tomorrow. It is a bank holiday on the island today.
In a radical departure from previous aid packages, eurozone finance ministers want Cyprus savers to forfeit up to 9.9pc of their deposits in return for a €10bn bailout to the island, which has been financially crippled by its exposure to neighbouring Greece.
Scenes of Cypriots lining up at cash machines raised the spectre of capital flight elsewhere and threatened to disrupt a market calm that settled over the 17-member bloc since the ECB's pledge in September to backstop troubled nations' debt.
With no government in Italy, Spain in the throes of a political scandal and Greece struggling to meet the terms of its own bailout, more turmoil could hamper efforts to end the crisis.
The euro weakened against the dollar yesterday, sliding 1.1pc by early evening.
The move to take a percentage of deposits, which could raise almost €6bn, must be ratified by parliament, where no party has a majority. If it fails to do so, Mr Anastasiades has warned that Cyprus's two largest banks would collapse.
A default in Cyprus could unravel investor confidence in the eurozone.
The levy is "a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future", Joachim Fels, chief economist at Morgan Stanley in London, said.
The proposed levies on deposits are 9.9pc for those exceeding €100,000 and 6.7pc on anything below that.
Those affected will include rich Russians with deposits in Cyprus and Europeans who have retired to the island, as well as Cypriots themselves.
Many Cypriots, having contributed to bailouts for Ireland, Portugal and Greece, are aghast at Europe's treatment.
Cyprus received a "stab in the back" by its EU partners, the daily 'Phileleftheros' said. But it and other newspapers highlighted the danger of plunging the banking system into more turmoil if politicians sat on the fence.