Cyprus Rejects Troika's Demand For Levies On Bank Deposits As Condition For Bailout, ECB Vows Support For Cyprus

on March 19 2013 4:42 PM
Cyprus protest
Cypriots oppose the Eurogroup bailout terms at a rally in Nicosia Monday, March 18, 2013. Reuters

Cypriot lawmakers Tuesday night resoundingly voted down a plan to assess a one-time levy on national bank deposits, a scheme designed to raise money demanded by international lenders before they would financially rescue the country.

By a 36-0 margin with 19 abstentions, members of parliament refused to cooperate with government negotiators who over the weekend agreed to raise €5.8 billion ($7.5 billion) and thus qualify for a €15.8 billion loan, Bloomberg News reported.

A so-called troika of international lenders, the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission, demanded that -- for the first time -- ordinary depositors should bear some of the burden of bailing out their economy.  The tough negotiating position reflected demands by Germany and other creditor nations in the monetary union that citizens of fiscally irresponsible nations start bearing some of the cost of being rescued.

Cypriots and global investors, however, were shocked at how Nicosia planned to raise the money:  expropriating as much as 6.75 percent of the balance on deposits below €100,000 euros and 9.9 percent on accounts larger than that. Depositors were incensed, and over the weekend long lines formed at automatic teller machines as depositors tried to front-run the government grab. Further, wealthy Russians who have deposited huge sums in Cypriot banks were furious, and the Cypriot finance minister made a sudden trip to Moscow to assuage the Russians.

The criticism both domestic and international forced the government of President Nicos Anastasiades to lower the amount being demanded of depositors with modest balances and to delay a vote on the revised plan. However, late Tuesday Cypriot lawmakers defeated the plan, raising the possibility that Cyprus may have to default on its sovereign debt obligations.

Stocks fell, the single currency dropped to a three-month low, the gold price rose and criticism poured in from wealthier euro zone nations.

“Cyprus has rebuffed the outstretched hand” of its partners, Hans Michelbach, a German lawmaker from Chancellor Angela Merkel’s Christian Democratic bloc, told Bloomberg News. The defeat of the levy is “an act of collective unreason” and “the people of Cyprus must now pay a high price.”

At the same time, however, the ECB said in a statement that it “takes note of the decision of the Cypriot Parliament and is in contact with its troika partners. The ECB reaffirms its commitment to provide liquidity as needed within the existing rules.”

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