PARIS: Lawmakers in Cyprus have thrown out a plan to tax bank deposits up to 9.9 percent as part of a bailout deal that raised fears across the eurozone as a possible precedent for other crisis-hit countries.
Although not unseen before -- Italy imposed a one-off 0.6 percent bank account tax in 1992 -- it is the first time it has been proposed since the eurozone debt crisis began.
Cyprus is the fourth eurozone nation to fall victim to the crisis, which has already resulted in enormous European Union/International Monetary Fund bailout packages for Greece, Ireland and Portugal.
Here is rundown of the Cyprus bailout terms rejected by the lawmakers:
- What is the Cyprus bank deposit levy?
It is a one-time special tax on all savings accounts, but the size of the levies depends on how big the deposits are. Under the first plan proposed on Saturday, savings that fell below 100,000 euros ($130,000) would have been hit with a 6.75 percent charge, but anything above that figure will be slapped with a 9.9 percent charge.
However, as Cypriots reacted angrily and global markets tumbled on Monday the terms were revised slightly so that the 6.75 percent levy only kicked in after 20,000 euros.
To compensate its depositors, Cyprus said it would hand deposit account holders bonds linked to potential future revenues from the country's natural gas reserves.
Cypriot President Nicos Anastasiades has called an emergency meeting of party leaders Wednesday to find a viable plan B aimed at saving the country from bankruptcy.
- Why do Cypriot savers have to help foot the bill?
When countries need help, they are often required to take unpopular measures.
In this case, the European Union, the International Monetary Fund and the European Central Bank, did not want to lend more than 10 billion euros, meaning Cyprus would have find itself the extra 5.8 billion euros estimated to be needed.
Having already been heavily exposed to the Greek financial crisis, Cypriot banks were not perceived as having enough capital and senior unsecured debt left to wipe out in order to cover the amount of funds needed.
However the island's banks hold considerable deposits, including from foreign savers and companies. Hence the levy.
Of the estimated 67 billion euros of deposits held by Cyprus banks, experts estimate that Russian deposits there amount to at least 15.4 billion euros ($20 billion).
"The alternative was to offer Cyprus a type of solidarity that some of the biggest countries were not prepared to show," Bruegel institute researcher Nicolas Veron said.
The EU has been criticised by some for providing only loans and not grants to crisis-hit countries.
- How did the markets react?
Badly on Monday but they did not succumb to panic and in Asia shares mostly enjoyed a healthy rebound in the following session.
Europe's main stock markets slipped on Tuesday ahead of the vote with
banking stocks suffering the brunt of the drop.
But once lawmakers had rejected the proposal on Tuesday Asian markets were mixed on Wednesday, with Jay Wong, portfolio manager with Payden & Rygel, saying: "Reaction certainly would have been greater if the levy had passed" as it could have set a precedent for the levy.
In foreign exchange activity, the euro was sitting around a 14-month low of $1.2880 but managed to avoid a heavy sell-off.
The borrowing rates for some of Europe's weakest economies also climbed somewhat, but not to excessive levels.
- What are the short-term effects?
Although many Cypriots have resorted to withdrawing their savings from local cash machines, the trend appears to be isolated to Cyprus so far.
UBS analyst John-Paul Crutchley said that outside of Cyprus, the short-term effects are likely to be limited, mainly thanks to the fact that other bailed out countries in Europe have already done much of the work to clean up their economies.
"We don't really see any reasons for savers in any of these countries to fear that they might have to contribute" in a similar manner, he said.
Giuseppe Vegas, president of Italy's market watchdog Consob, said: "Could this happen in Italy? I really don't think so".
- What will happen to investor confidence?
While many agree that this may have been the only way out for Cyprus, most experts say it will deal a great blow to confidence in Europe's financial stability as a whole.
"If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job," said CMC Markets analyst Michael Hewson.
"The dawn raid on the previously sacrosanct savings of depositors will draw unwanted attention to the struggling peripheral banks throughout the eurozone," added analyst Mike McCudden at online brokerage Interactive Investor.
"To have bank clients contribute, as an exceptional measure, has to stay a unique case," Andreas Schmitz of Germany's BdB banking federation said.
Guido Ravoet, the head of the European Banking Federation, said "this decision could penalise small depositors and generate just that type of uncertainty that our economy doesn't need in the current circumstances".
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