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Upheaval in Cyprus

A plan in Cyprus to seize up to 10% of people’s savings has raised concern, if not panic, in the rest of Europe about the security of bank deposits in times of financial turmoil. A look at the plan.

world Updated: Mar 20, 2013 02:26 IST

A plan in Cyprus to seize up to 10% of people’s savings has raised concern, if not panic, in the rest of Europe about the security of bank deposits in times of financial turmoil. A look at the plan.

How can they do that?
As a member of the euro currency, Cyprus can raise or lower taxes whenever it wants. It isn’t the first time that a eurozone nation has raised taxes to cope with mounting debt and to prop up struggling banks. Residents of Greece, Portugal and Ireland — all bailout recipients — have seen their tax bills skyrocket in recent years. But Cyprus is charting new ground.

How will it work?

Banks have already acted to seal off the amount of the levy — a 6.75% tax on deposits under ¤100,000 and 9.9% on those above — so depositors can’t access it. Banks will remain closed until Thursday to avoid a rush of withdrawals while lawmakers finalise the move. They will vote on Tuesday, but some are seeking modifications, mainly to lower the tax rate on deposits under ¤100,000. To do that, however, they have to raise the rate for the larger depositors, since the overall scheme has to raise a total of ¤5.8 billion.



Who is affected?

All people with money in Cypriot banks — except those with money in Greek branches, which will be sold to Greek banks. EU and IMF creditors clearly wanted to protect struggling Greece, but perhaps also saw that Greece is the most likely place in the eurozone for a bank run. Protecting depositors there minimises that possibility. Of the more than 68 billion euros on deposit in Cypriot banks, foreigners hold about 40%, most are Russians. http://www.hindustantimes.com/Images/Popup/2013/3/20_03_pg17bb.jpg



What is the need?

Cyprus built its economy in recent years by becoming a financial centre, much the way Ireland and Iceland before it did. Its banks offered Internet accounts to foreigners, were renowned for their service, provided substantial privacy to clients and had very low taxes. It worked so well that Cyprus’ banking industry ballooned to nearly eight times the country’s GDP at the height of the boom. But Cyprus’ banks held a lot of Greek debt and suffered significant losses when they took a writedown of those bonds as part of the Greek bailout. Much of Cyprus’ bailout money will be used to recapitalise Cypriot banks.

The Russian angle
Russian businessmen have preferred to place their savings in offshore jurisdictions, partly to escape political uncertainty and corruption in Russia. Cyprus offers a 10% corporate tax rate and stable political situation. Cyprus is also believed to be a top destination for money-laundering. It is much safer for a corrupt Russian official to keep proceeds from illegal activities abroad, hiding information about their fortunes and holdings away from the prying eyes of Russian banking regulators. Russian officials estimated that about $49 billion was wired to foreign accounts illegally last year.