Cyprus vote

How western MSM sees it

Cyprus bailout deal closer after MPs vote for bank shake-up

Savings tax back on the agenda as island's finance minister returns empty-handed from talks in Russia

the Guardian,

22 March, 2013

After a day of high drama, Cyprus's parliament approved legislation on Friday night to restructure its banking sector and create a national solidarity fund that could save it from crashing out of the eurozone.

Following 12 hours of tortuous debate, Nicosia's 56-member house endorsed the legislation, seen as central to raising the €5.8bn (£4.9bn) that international creditors have set as a condition for a €10bn bailout.

MPs also agreed to imposing capital controls although they stopped short of voting on a highly contentious levy on bank deposits, now expected to take place on Saturday. If it is approved, Cyprus's leader is expected to head to Brussels for talks with top officials.

As the news broke, eurozone finance ministers announced that they would meet again on Sunday to discuss the Cypriot government's latest bid to halt a crisis that has sent tremors through the 17-nation bloc.

The race to secure a bailout from the EU and IMF intensified as the country's banks remained closed. Demonstrators rallied outside parliament after the island's finance minister, Michalis Sarris, returned empty-handed from two days of talks in Moscow.

Cyprus needs €17bn and is in negotiations to get €10bn from the EU, the IMF and the European Central Bank. The remainder must come from the country's own resources. The original bailout plan, announced last Saturday, would have raised €5.8bn by skimming nearly 7% off all bank deposits of less than €100,000, and 9.9% of bigger bank accounts. A package of austerity measures was also planned to take the total to €17bn.

The re-emergence of the savings tax proposal, despite its unanimous rejection by the Cypriot parliament earlier this week, came after Sarris returned with the news no one wanted: that talks with Russia had failed to produce a result.

"I think that [the savings tax] is clearly on the table, that it is something that needs to be discussed to see whether a levy on deposits of some sort … would make a contribution to finalising the package," Sarris said.

On Friday night it was expected that the levy will focus only on accounts with more than €100,000, a move that will almost certainly stoke tensions with Moscow. Russian investors have €30bn deposited in Cypriot banks – the island is a tax haven – and the initial plan provoked anger at the highest levels of government in Russia.

President Nicos Anastasiades had proposed that small savers be included for fear of driving away the Russians, whose deposits are vital to keeping the Cyprus banking system afloat. The Russian government has already extended a €2.5bn loan to Nicosia, which the Cyprus government needs to retain.

The volte-face on the bank levy followed mounting criticism of MPs for rejecting the first bailout accord. Prominent former MPs accused the island's political elite of pandering to populist sentiment in the maelstrom of outrage that the proposal triggered. Critics said that, had the levy been passed, the government would not have been forced to draw up alternative plans. These now include the restructuring of the island's second biggest bank, Laiki, a move that its chief, Takis Phidias, described as a "disaster not just for the bank but for the economy of Cyprus". The basic plan is to split the bank in two.

Earlier in the day Germany's chancellor, Angela Merkel, appeared to reject the alternative scheme of a solidarity fund, saying it would not be sufficient to raise the money required to unlock €10bn in aid. The fund will pool national assets including hypothetical returns from offshore gas and oil reserves, nationalising Cypriot workers' pension funds, and revenues from the sale of assets belonging to Cyprus's affluent Orthodox church.

The Anastasiades government proposed the creation of the fund after the ECB threatened to cut off emergency aid to Cypriot banks by Monday if the country failed to convince creditors it could meet the onerous conditions of the bailout accord.

George Vassiliou, the former president of Cyprus, told the Guardian it was imperative that the banking system was not allowed to collapse.

"Cyprus is not just an island in the sun," he said. "We have developed a unique service sector based on confidence in the banking system. If that confidence is lost then you have nothing left. Everything that has been created will be destroyed with formidable repercussions."

He said there was "no doubt" that ordinary people should contribute to the island's financial rescue. But he criticised the lack of foresight ministers had shown in announcing the levy.

With German elections looming in the autumn, Merkel has adopted a tough stance. She told German MPs the Mediterranean island's business model was obsolete and that the bailout would need to be structured in such a way that it could be repaid. Cyprus, she said, could no longer depend on its reputation as an offshore tax haven.

Greece also weighed in, announcing that its local lender, Piraeus Bank, would buy branches of Laiki and the Bank of Cyprus in Greece.

The move came as officials in Athens expressed consternation over Germany's apparent determination to cut Cyprus loose if need be.