Under the proposal, bank deposits of more than 100,000 euros, or about $130,000, would be taxed at 9.9 percent. Deposits under $130,000 would be taxed at 6.75 percent, even though the government of Cyprus had issued deposit guarantees, similar to those from the U.S. Federal Deposit Insurance Corp., up to that level.
Cyprus’s banks sustained a heavy hit when they were forced to write off large portions of their loans to Greek banks and holdings of Greek government bonds as part of a bailout of that country last year.
“We are living through the most tragic moments since 1974,” when Cyprus was invaded by Turkey, Cypriot President Nicos Anastasiades said late Sunday in an address to the country.
On Monday, Cypriot lawmakers were discussing a new proposal that would lower the burden on smaller depositors and raise it on larger ones.
But the damage may have been done.
“I really think it’s a disaster,” said Clemens Fuest, the president of the Center for European Economic Research in Mannheim, Germany, and a top adviser to the German Finance Ministry. “This is quite nasty and it’s quite hard to understand, because it really is a blow to the entire project of a banking union” that the euro zone is trying to create — in part to ensure that banking problems do not overwhelm national governments.
Gary Jenkins, managing director of Swordfish Research, said that “if in 12 months’ time, normal people in Spain or Italy see some kind of bailout headlines and they remember that depositors in Cyprus lost their money, they’re going to take out their money.”
Cyprus, whose economy is just 0.2 percent of the 17-nation euro zone, took a $3.3 billion loan from Russia in 2011 to avoid resorting to a European and IMF bailout.
Wealthy Russians have flocked to Cyprus since the 1991 breakup of the Soviet Union, attracted by the prospect of socking their money away from the prying eyes of Russian finance officials. About $19 billion in Russian deposits is in Cypriot banks, according to Moody’s estimates. Cyprus’s attractiveness as a financial hub increased after it joined the European Union in 2004, a move that was seen as further increasing its political and financial stability. The island has about 1.1 million people, but the territory controlled by the Cypriot government has 840,000 residents. Turkish Cypriots control the northern part of the island.
German Finance Minister Wolfgang Schaeuble said late Sunday that the decision to spread the losses across all depositors in Cyprus was a decision made by Cypriot policymakers, not those outside the country.
“We were in need of a certain sum” from deposits, Schaeuble told ARD television. “If going very high in charging large investors was to be prevented, the sum would only be reached if it were produced over a broad range” of depositors.
If Cyprus rejects the bailout altogether, he said, “the banks in Cyprus are bankrupt, and Cyprus will be in a very difficult situation.”
Kathy Lally in Moscow contributed to this report.