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article imageStock markets decline as Cyprus reworks tax on bank deposits

By Ken Hanly     Mar 18, 2013 in Business
Nicosia - A vote on the plan to tax bank deposits in Cyprus was postponed as ministers try to revise the plan amid fears that as it is, it might be defeated in the Cypriot legislature.
The government is trying to tilt the tax away from smaller deposits to larger ones over 100,000 euros ($130,700). There are many large Russian deposits in Cypriot banks. Putin has already reacted angrily to the planned tax. Reports suggest that a revised plan to introduce a tax-free threshold of up to 20,000 euros that would protect smaller depositors was under discussion. The banks are closed and will remain closed until Tuesday. BBC is now reporting that banks in Cyprus will remain closed until Thursday.
The tax is part of a deal for a $13 billion dollar bailout. In previous bailouts bank deposits have not been touched. To in effect confiscate a certain percentage of deposits without notice is hardly a recipe for restoring confidence in the financial system. One wonders what is means to say that deposits are guaranteed. Perhaps this action will result in a run on deposits in other countries where banks are facing problems such as Italy or Spain.
The euro and stock and bond markets fell on concern the euro zone crisis was returning. European Central Bank policymaker Joerg Asmussen who was involved in the weekend negotiations said:"It is up to the government alone to decide if it wants to change the structure of the ... contribution (from) the banking sector,The important thing is that the financial contribution of 5.8 billion euros remains." Residents emptied cash machines over the weekend.
Cyprus central bank governor Panicos Demetriades said in parliament: "The most important question is what would happen the following day if the bill isn't voted. What would certainly happen is that our two big banks would need to be consolidated. This doesn't mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way."
In the New York Times economist Paul Krugman wrote: "It's as if the Europeans are holding up a neon sign, written in Greek and Italian, saying 'Time to stage a run on your banks!'"
Russia has considerable money in Cypriot banks. It is considering extending a 2.5 billion euro loan to help bail out the island. Russia was angry that it had not been consulted on the deal. Russian finance minister, Anton Siluanov told Reuters:"It turns out that the euro zone actions ... took place without discussions with Russia, so we will consider the issue of restructuring the (Cyprus) loan taking into account our participation in the joint actions with the European Union." President Putin called the bank levy unfair and said it set a dangerous precedent.
No party in the Cypriot 56 member parliament has an absolute majority. Three parties have said they will not support the deal. A Sunday vote has been postponed so as to build a consensus that will more likely pass the parliament. Sources told Reuters on Sunday that one possibility was to reduce the tax rate from 6.7% to 3.0% on deposits under 100,000 euros but at the same time to raise the amount from 9.9% to 12.5% above that level. Usually one receives benefits from having larger deposits but in Cyprus apparently it is the other way around. In future, the Cyprus banks will be avoided by outsiders considering making large deposits in their banks.
The speaker of parliament who is head of the small Socialist Party said:"Essentially parliament is called to legalize a decision to rob depositors blind, against every written and unwritten law. We refuse to subscribe to this."
U.S. stocks also fell on Monday as investors fear that the euro-zone crisis could escalate again. The Toronto Stock Excchange was also down slightly. The Dow Jones lost just over 14 points a quite modest decline after earlier being down more than one hundred points. Both the S and P and Nasdaq were also down slightly. Asian stocks also dropped on the news from Cyprus.
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