The controversial and unprecedented levy on bank deposits in Cyprus is in jeopardy as the Cypriot government signalled that it would not approve the measures, and as Eurozone finance ministers responded to the backlash by loosening their stance on the issue.
The European Union wants to force customers of Cypriot banks to participate in the country’s multi-billion Euro bailout. The one-time levy, which is expected to raise around €5.8 billion ($7.5 billion), is the precondition being set for additional aid of around €10 billion that would come from the permanent Euro rescue fund, the European Stability Mechanism (ESM).
The Cypriot government is due to vote on the issue today after it was delayed for two days as politicians hammered out the details of the legislation that would impose a one-time levy on bank depositor accounts.
In a shocking lack of foresight the EU’s finance ministers were taken by surprise at the level of anger and massive international criticism caused by the plans that could start a sinister and worrying precedent. The Finance ministers backtracked on the levy’s structure, which initially called for a 6.75% tax on deposits under 100,000 Euros and 9.9% over that amount. The levy should now be more progressive, though must yield the same amount.
“Things were confused” after the measures was announced, French finance minister Pierre Moscovici said. “The perception was confused. Once this confusion was born, we had to revisit the decision.”
In face of the backlash the Cypriot government offered an altered plan under the terms which:
Those with savings of up to €20,000 would not be hit by the levy.
For savings of between €20,000 and €100,000, a 6.75 percent tax would have to be paid to the state.
Accounts with over €100,000 would be hit with a 9.9 percent levy.
Finally, customers hit by the partial expropriation would be given compensation in the form of shares in the bank.
Economists are playing down the issue which has led to the Euro stabilising.
“The worry about Cyprus is overdone, as the scenario is unlikely to spread to bigger euro-zone countries,” said Lee Young-gon, an analyst at Hana Daetoo Securities in Seoul.
The markets are rife with concern that if the deal is implemented it could start a trend for similar deals being used in other troubled European countries. With citizen’s finances already under strain, a raid on their savings by their own government and unelected European officials will not sit well.
As of 1:00 pm
The Euro to Pound Sterling exchange rate is currently trading in the region of 0.8555
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