Cyprus is preparing to seize up to a fifth of the value of wealthy savers’ bank accounts in a desperate attempt to stave off financial meltdown.The planned raid will be put to Europe’s finance chiefs in Brussels for approval on Sunday evening, hours before the deadline set for an agreement without which the European Central Bank will remove support for the island’s banks.
Their collapse would set Cyprus on a path to becoming the first country forced to exit the euro.
The government in Nicosia is considering a levy of 20 per cent on deposits of more than €100,000 (£85,300) held at the Bank of Cyprus, one of the island’s most troubled lenders, according to a senior Cypriot official. There are said to be 10,000 such accounts at the bank, though their total value has not been made public.
Similar high-value deposits in other Cypriot banks may face a levy of 4 per cent.
The move is among a package of emergency fundraising measures designed to persuade eurozone officials to agree to a €10 billion (£8.5 billion) bail-out deal over the weekend.
Late on Friday night, the Cypriot parliament also backed a revenue-raising levy of less than 1 per cent on bank deposits below €100,000 — a rate seen as fairer than the 6.75 per cent levy rejected by legislators last Tuesday.
However, the 20 per cent rate on high-value accounts at the Bank of Cyprus is likely to cause further ructions on the island, which has seen widespread protests in the last week. It is expected to particularly hit Russian investors, who make up the bulk of the Cypriot financial sector’s high-value clients.
Chris Drake, a retired BBC journalist who lives on the island, said he believed that few of Cyprus’s 60,000 Britons would be at risk.
“The Bank of Cyprus has been in deep trouble for a long time so most people I know moved their money out some time ago,” he said.
The announcement came as Michael Sarris, the Cypriot finance minister, said “significant progress” had been made in talks in Nicosia with officials from the European Union, European Central Bank and the International Monetary Fund. The Cypriot president, Nicos Anastasiades, is due in Brussels shortly for further discussions with senior EU leaders, including Herman Van Rompuy, the European Council president, and Christine Lagarde, the IMF’s managing director.
Olli Rehn, the European Economic and Monetary Affairs Commissioner, said it was essential that eurozone finance ministers reached an agreement on a rescue deal on Sunday.
“There are only hard choices left,” he said.
The government has been given the power to impose limits on how much can be drawn from banks, which are due to reopen on Tuesday.
More measures are due to be debated by the Cypriot parliament, aimed overall at raising €5.8 billion as collateral for the bail-out package.
About €2.8 billion of that will come from the restructuring of Cyprus Popular Bank, the country’s second largest lender, and the sale of Greek branches of Cypriot banks, which are laden with toxic assets.
Other measures approved by the Cypriot parliament late on Friday night include a plan to nationalise state pensions and split failing lenders into good and bad banks.
The government has also been given the power impose limits on how much can be drawn from the country’s banks, a move designed to stop a mass cash-flight from the island next week. The banks, which have been shut since last Saturday, are due to reopen on Tuesday, after an official Bank Holiday on Monday.
It remains to be seen, however, whether eurozone finance chiefs will deem the Cypriot proposals up to scratch. If not, the country could ultimately become the first country to depart the eurozone altogether.
The Dutch head of the eurozone finance ministers’ group, Jeroen Dijsselbloem, said it wanted to keep Cyprus within the currency union, but when asked about an exit did not rule it out.
“All kinds of scenarios are possible,” he said. “The scenarios we’re focusing on are to come to a joint solution in which Cyprus is saved but in which the banking sector continues in a smaller but healthier form.”
Cypriot MPs, meanwhile, said that the German Chancellor, Angela Merkel, had told them that Cyprus would now have to reduce drastically the size of its banking sector, effectively ending its lucrative years as an international financial services centre.
The tax of less than one per cent on all bank deposits was described as “the least worst option” by Averof Neophytou, deputy head of the governing DISY party.
“We owe an apology to the Cypriot people because we all share in the responsibility of bringing this place to this state,” he said.
It also got grudging acceptance from ordinary Cypriots, most of whom are now desperate for financial security after a week which many feared they could lose their savings altogether.
“If we have Europe’s support so our banks won’t collapse, I wouldn’t have a problem with a deposit tax,” said pensioner Demetrakis Papanicolaou, 64.
Economic life in Cyprus has all but ground to a halt in the last few days, as the closure of the banks has turned the country into cash-only economy.
Town centres are all but deserted, and retailers, facing cash-on-delivery demands from suppliers, have warned that stocks are running low.
“At the moment, supplies will last another two or three days,” said Adamos Hadijadamou, head of Cyprus’s Association of Supermarkets. “We’ll have a problem if this is not resolved by next week.”
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