Cyprus ‘scraps bank levy’ in new bailout plan

Bank customers at ATM in Nicosia, 21 Mar 13

Political leaders in Cyprus appear to have dropped an unpopular levy on bank deposits in a new bailout plan.

There was outrage over an earlier plan to tax all bank deposits.

Cyprus’ banks, which have been shut all week to prevent mass withdrawals, are to stay closed until next Tuesday.

Cyprus is required to find 7bn euros (£6bn; $9bn) to get a 10bn-euro EU-IMF loan. Cypriot officials now propose a state investment fund and special bond issue to raise 5.8bn euros.

The other 1.2bn would be raised through privatisations and by increasing capital gains tax and the corporate tax rate.

Details of the new plan are still being worked out, and it is not clear if it will be put to a parliamentary vote on Thursday.

The European Central Bank (ECB) has warned it may halt emergency funding on Monday if Cyprus fails to come up with a viable rescue plan by then.

Cypriots are finding it increasingly difficult to perform everyday financial transactions as cash and credit dries up.

“We didn’t discuss a [deposit] haircut and we are not reverting to it,” Cypriot parliament speaker Yiannakis Omirou told reporters, in remarks quoted by Reuters. He was speaking after an emergency meeting between politicians and President Nicos Anastasiades.

The deputy leader of the ruling Democratic Rally party, Averof Neophytou, said party leaders had unanimously agreed to create a “solidarity fund” with state assets, which would be used for an emergency bond issue, Reuters reported.

That plan was confirmed by government spokesman Christos Stylianides.

But one senior government MP, who did not want to be named because he said discussions were not over, said the bank levy would remain in some form, the BBC’s Chris Morris reports from Nicosia. Without it, the MP said, Cyprus could not raise all the money it needed.

Russian investment

The previous proposals had included a levy on deposits between 20,000 and 100,000 euros, which had outraged many Cypriots.

Eurozone bailouts - graphic

There has been much speculation that the new Cypriot plan could include Russian help, as Russia has multi-billion dollar investments in Cyprus.

Russians, including wealthy tycoons, hold between a third and half of all Cypriot bank deposits.

Russian Prime Minister Dmitry Medvedev has poured scorn on the eurozone’s bailout plan for Cyprus, accusing EU leaders of behaving “like a bull in a china shop”.

In Moscow on Thursday he told European Commission President Jose Manuel Barroso that all interested parties, including Russia, should be included in a deal for Cyprus.

The Cypriot Finance Minister Michalis Sarris is in Moscow for a second day to negotiate assistance.

Analysts say Russia may provide more funding in return for interests in Cyprus’ offshore energy fields.

The country’s two biggest banks, Bank of Cyprus and Laiki, are believed to be reliant on the ECB’s Emergency Liquidity Assistance, provided via the Central Bank of Cyprus.

The ECB’s governing council can halt ELA if it believes the banks receiving it are no longer solvent, the Financial Times newspaper reports.

The banking sector dominates Cyprus’ economy and if a viable rescue is not organised soon the island state risks having to abandon the euro.

Cypriot banks were among the bondholders who had to take a big “haircut” in the second massive bailout for Greece.

Since 2008 the eurozone has been badly bruised by the massive bailouts provided for Greece, the Republic of Ireland and Portugal. There is a widespread reluctance to commit more EU taxpayers’ money to ailing banks in southern Europe.

The BBC’s Mark Lowen, in Nicosia, says Cyprus is a resilient nation and the banks are still giving out cash through machines – although with limits, and some are running low.

Some businesses are now refusing credit card payments, our correspondent reports.

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