December 1, 2023

Facing Bailout Tax, Cypriots Try to Get Cash Out of Banks

The move — a first in the three-year-old European financial crisis — raised questions over whether bank runs could be set off elsewhere in the euro zone. Jeroen Dijsselbloem, the president of the group of euro area ministers, early Saturday declined to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered.

People crowding cash machines around Cyprus were stunned and angry at the decision. A crowd of around 150 demonstrators massed in front of the presidential palace late in the afternoon after calls went out on social media to protest the abrupt decision, which came with almost no warning at the beginning of a three-day religious holiday on the island.

Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus banks in recent years. But even deposits under that amount would be taxed at 6.75 percent, meaning that Cyprus’s creditors will be taking money directly from pensioners, workers and regulator depositors to pay off the bailout tab.

Sharon Bowles, a British member of the European Parliament who is the head of the body’s influential Economic and Monetary Affairs Committee, said the accord amounted to a “grabbing of ordinary depositors’ money,” billed as a tax.

“What the deal reflects is that being an unsecured or even secured depositor in euro-area banks is not as safe as it used to be,” said Jacob Kirkegaard, an economist and European specialist at the Peterson Institute for International Economics in Washington. “We are in a new world.”

Cyprus has been a blip on the radar screen of Europe’s long-running debt crisis — until now.

Hobbled by a devastating banking crisis linked to a slump in the economy of neighboring Greece, Cyprus on Saturday became the fifth country in the euro union to receive a financial lifeline since Europe’s debt crisis broke out. As the euro zone’s smallest economy, Cyprus had hardly been considered the risk for the euro union that Greece, Ireland, Portugal or Spain were.

But the surprise tax by the International Monetary Fund, the European Central Bank and the European Commission is the first to take money directly from ordinary savers. In the bailout of Greece, holders of Greek bonds were forced to take losses — but depositors’ funds were not touched.

President Nicos Anastasiades, who was elected into office just a few weeks ago, said he would address the nation on Sunday. In a statement, he called the decision “painful” but said it would lead to “the historic and definitive rescue of our economy.” He said the consequences of rejecting the deal would be the collapse of at least one of Cyprus’s major banks, amid widespread weakness in the Cyprus banking system.

Cypriot banks are loaded up on bad loans made to Greek companies and individuals, which have turned sour at an alarming rate as Greece deals with the fourth year of a devastating economic and financial crisis.

“I’m not surprised that people are trying to get their money out in Cyprus; that is entirely to be expected,” Mr. Kirkegaard said. “They wake up Saturday morning and are told on the radio their bank deposits are at risk.”

The deposit tax — which is expected to raise 5.8 billion euros — appeared aimed at gleaning large amounts of cash from the bank accounts of wealthy Russians, who have poured deposits into Cypriot banks in the past several years. Chancellor Angela Merkel of Germany, who is facing a pivotal election in September, has been particularly concerned that most of the bailout money could wind up in the hands of Russian gangsters and oligarchs, a fear backed by a recent report by Germany’s intelligence agency. Officials in Cyprus have maintained there is no proof that the Russian cash is of questionable origin. They insist they cracked down on money laundering before joining the European Union.

Because Russian depositors would have to share the burden, it would ultimately relieve Cyprus from its debt load, by allowing a one-time payment upfront rather than deeper cuts to salaries and pensions or additional privatizations in the future.

Still, Mr. Kirkegaard said that he was surprised that Cyprus’s creditors had decided to go after smaller depositors, but that part of the rationale might have been avoiding putting too much pressure on businesses, which hold a large share of the higher-value accounts.

The Cyprus Parliament still must vote the measure into effect, and was planning to meet in an emergency session on Monday, a nationwide holiday. Given the stunned reaction, though, it was not certain to pass. Nicholas Papadopoulos, the head of Parliament’s financial affairs committee, said the decision was “much worse than what we expected and contrary to what the government was assuring us, right up until last night,” Reuters reported.

Nicholas Kulish contributed reporting from Berlin, Landon Thomas Jr. from London, James Kanter from Brussels and Andreas Riris from Nicosia.

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