Bank holiday declared in Cyprus

Monday has been declared a bank holiday in Cyprus

Money will be cut from accounts by Tuesday morning

THE ONE-OFF levy on bank deposits agreed between Nicosia and international creditors will impact all Cypriot account holders.

Cyprus Mail,

17 March, 2013

In addition to Cypriot commercial and co-operative banks, Barclays, Russian Commercial Bank and Societe Generale, among others, would be affected.

“As we understand it, anything with credit will be subject to the levy, be it a deposit or current account,” bank sources said.

The Cyprus deal means the country’s savers, almost half of whom are believed to be non-resident Russians, are asked to pay up to 10 per cent of their deposits to raise some €5.8 billion for the government.

International lenders will put up around €10 billion to help the island pay back its debt.

People with less than €100,000 in Cypriot bank accounts will have to pay a one-time tax of 6.75 per cent, while those with more will have to pay 9.9 per cent.

Euphemistically dubbed a “solidarity levy,” what it amounts to is a haircut on deposits, economic analysts said.

Savers will be ‘compensated’ in the form of bank shares of an equal value to the amount contributed, finance minister Michalis Sarris told the state broadcaster.

In addition to the levy, Sarris said, a 20 to 25 per cent tax will be imposed on the interest on deposits.

And in return for emergency loans, Cyprus additionally agreed to increase its corporate tax rate by 2.5 per cent to 12.5 per cent.

The deal was reached after late-night discussions in Brussels with the International Monetary Fund (IMF).

In return for the €10 billion bailout, Cyprus has been asked to reduce its deficit, shrink its banking sector and increase taxes.

Bank sources said a run on bank ATMs started from Friday night – while the Eurogroup was in progress –peaking yesterday morning as soon as news broke from Brussels.

“The ATMs are running out of cash,” a source said.

The frenzy of withdrawals was triggered by savers likely thinking that by reducing their bank balance they would reduce their taxable amount.

However understandable, it was probably an exercise in futility, because the taxable amount will apply retroactively, from the moment the deal was struck in Brussels.

Joerg Asmussen, a member of the executive board of the European Central Bank, said the Cypriot parliament would have to legislate on the measure over the weekend and the tax, which he said had already been frozen in deposits, would be removed before banks opened on Tuesday morning.

He said also the Cypriot Central Bank had done “contingency planning” for the event of a run on the nation's banks after the announcement of the extraordinary measures.

Asmussen said Cyprus's banks would have to continue receiving funding the Central Bank of Cyprus's Emergency Liquidity Assistance facility- an expensive lending program -but would be able to access normal ECB financing after they had been recapitalized.

The ECB official justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue.

Greek depositors would not be hit, Asmussen said. Cypriot bank branches would be “ring fenced” and sold off to a Greek bank at a later date.

Before Tuesday – when the banks reopen after an extended weekend – the government hopes to pass three bills in total – one on the corporate tax, another on the levy on deposits and a third on the tax on interest on deposits.

A House plenum was expected to be convened today or tomorrow at the latest; House Speaker Yiannakis Omirou was forced to cut short a visit to London and return to the island last night.

The urgency of the matter mobilised the entire state machinery. Technocrats from the finance ministry, the Central Bank and officials from the Attorney-general’s office were yesterday summoned to the Finance Ministry to begin drafting the items of legislation.

The Association of Cyprus Banks also convened.

The Mail was told also that, as early as Thursday evening, Attorney-general Petros Clerides got a call from Brussels asking him to start working on the bills.

Sources close to the Bank of Cyprus said they had received verbal instructions to suspend internal internet banking.

To avert a run on the co-operative banks the Co-operative Central Bank instructed outlets to lock their systems to prevent transactions. Many branches remained closed for the day; co-operatives are normally open for business on Saturdays.