Tuesday, March 19, 2013

Eurogroup distances itself from decision to tax small depositors in Cyprus

At some point yesterday, it became clear that Cypriot President Nicos Anastastasiades would not have sufficient support to push the deal on the deposit tax through parliament – at least not in its current form.

That led to an extension of the bank holiday to at least Thursday, the parliamentary vote being moved to 4pm GMT today (from yesterday) and the Eurogroup holding a teleconference yesterday evening.

The result of the conference was this statement, the key part being:
The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000. The Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on 16 March, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance up to EUR 10bn.
The statement seems to be more of a hand washing exercise than a definitive end to the issues plaguing the Cypriot bailout – i.e. do whatever you need to in order to raise the €5.8bn but don’t blame us for your political troubles.

Ultimately, it is not clear that deposits below €100,000 will not be taxed. The two options on the table remain:

-          Depositors with up to €100,000, taxed at 3%; those with €100,000 to €500,000 taxed at 10%; and those with over €500,000 taxed at 15%. (This could also include an exemption of deposits below €20,000).
-          Tax deposits over €100,000 at 15.2% and exempt deposits below €100,000.

How much difference will this move make?

Well, removing the burden on smaller depositors would be a positive one, as we have suggested. That said, with the cat out of the bag as it were, this is unlikely to dial down frustrations or concerns significantly. This option is now on the table and the political divisions it has exposed are unlikely to be easily papered over.

Despite the fact that it seems the Cypriot government played a large role in the decision to structure the tax to hit smaller depositors in the first place, the anti-German feeling seems to be rising. Meanwhile, we still believe that the position of the government – which was elected on the basis of ruling out losses for any (large or small, foreign or domestic) depositors – remains precarious.

10 comments:

Andrew Smith said...

It is a well established principle in the EU that member states governments take all the blame for problems while any credit for routine matters is heaped on the EU.

That is one of the ways political integration is advanced in the face of logical and democratic opposition.

Optymystic said...

And the converse in the member states isthat the eu is the source of all evil while the national government works tirelessly in the interests of the electorate.

The intriguing political aspect of all this is why the eurogroup did not say as it should have said, "Go away and find €6 Bn, to make up the balance between our offer and your big hole. That is your problem. Oh, and by the way, don't forget the €100 000 guarantee on deposits, while you are at it." Not getting caught out telling sovereign Cyprus how to solve the problem would one have thought been a lesson these very eminent politicians absorbed with their mothers milk. Whenever I took a problem to my supportive senior management, the answer was always the same. "That's your problem

Optymystic said...

What's more, by not getting caught out telling Cyprus how to run its own sovereign affairs, the eurogroup would have side-stepped the head-on conflict with Russia.

volvoman said...

Refer to NMP, which is Not My Problem!

IDRIS said...

I am unable to see any way in which this cash grab, unless cancelled in its entirety, will not lead to cash pouring out of eurozone banks to safe havens. Why would anyone with cash in any eurozone banks leave it there in these circumstances, other than the absolute minimum for day-to-day purposes?

A BBC reporter has just said that the future of Cyprus' economy "now hangs in the balance" but surely the futures of the euro and the EU do too.





Anonymous said...

and the UK's David Cameron wants us to stay a member of this socialist madhouse run by unelected incompetants ?

John King said...

The legal hierarchy for banks is that equity, then subordinated debt, then senior debt and depositors are forced to takes losses – in that order. Cyprus didn’t do that. This will not be lost on depositors in other at risk banking systems. Laws and government guarantees have become meaningless as the TROIKA seeks to ensure that their crony friends in high places are left the ability to remain financially viable. Currently, world markets are slow to wake to the news. This will give those who are alert time to prepare. The majority won’t.

Anonymous said...

The EU has broken finance and is trying to silence financial markets by introducing draconian legislation. When is our (UK) government going to wake up and get angry.

Rollo said...

A friend in need is no friend of mine... EU

Anonymous said...

The EU wants to change/shrink the entire banking system of Cyprus overnight, effectively destroying the local economy whose 40% is occupied by the finance/banking sector. It took me 5 months to find a decent job with an Oxford degree on the island two years ago. Now? I am sorry to say that the Eurogroup's collective intelligence has turned out to be a real disappointment. Hm.