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Cyprus shuts banks through Thursday amid fears of widening crisis

March 18, 2013|By Anthee Carassava

ATHENS — Amid renewed fears of a widening economic crisis in Europe, Cyprus on Monday ordered its banks shut through Thursday, postponing for a second time in two days a crucial parliamentary debate on whether bank depositors on the Mediterranean island should pay a levy of up to 10% in exchange for a $13-billion international bailout.

European banks and officials, meantime, also weighed in, allowing Cyprus’ newly elected government time and leeway to revise parts of the controversial bailout, which would use funds from Europe and the International Monetary Fund to prop up the nation's faltering banks.

Failure to push the bailout plan through the 54-seat parliament — the vote was planned for Monday but then pushed back to Tuesday — could prompt bank runs and a chaotic Cyprus default that would further endanger the fate of Europe’s single currency, the euro, which has been caught in a stubborn debt crisis for five years.

Cypriot President Nicos Anastasiades, a conservative who was elected just three weeks ago, said in a nationally televised address over the weekend that the deposit tax was the only alternative to a disorderly bankruptcy.

The unprecedented scheme, part of the $13-billion bailout package hammered out by European officials over the weekend, would subject account holders with more than $130,000 to a 9.9% tax and those with less to a 6.75% levy.

Anastasiades acknowledged that the plan was painful but said it would “eventually stabilize the economy and lead it to recovery.”

He vowed to try to modify some elements of the plan to protect small savers. Reuters news agency reported Monday that officials were hoping to cut the tax to 3% for deposits of less than $130,000 and increase the rate to 12.5% for larger deposits.

Still, critics warned that by forcing common Cypriots to pony up much of the bailout funds needed for the banks’ rescue, the European Union was not only breaching its own rules of protecting depositors’ savings but also setting a precedent that could spook people in other countries with troubled banking sectors.

On Monday, fears of a fallout from the Cyprus plan had global markets swooning. The euro fell sharply as did a rash of other currencies, including the Russian ruble, prompting Russian President Vladimir Putin to join in criticism of the bailout deal, which his spokesman called “unjust, unprofessional and dangerous,” according to news agencies.

A favorite tax haven for Russian oligarchs, the island held about $26 billion in Russian accounts last November, according to an analysis attributed to the Germany national intelligence agency. That, according to analysts and officials in Brussels, Nicosia and Athens, appeared to be one of the reasons that Germany, Europe’s paymaster, insisted on the bank levy, fearing that the European bailout funds would sink in a pit of corruption.

“German Chancellor Angela Merkel is up for reelection this fall,” said Napoleon Marveyas, professor of economics at Athens University. “There is no way she would have convinced her own to effectively come to the rescue of Russian oligarchs.”

On Monday, Joerg Asmussen, a member of the European Central Bank's governing council, said the exact terms of the bailout were still up to the Cyprus government to fine-tune.

"It's the Cyprus government's adjustment program,” he said. ”If Cyprus' president wants to change something regarding the levy on bank deposits, that's in his hands. He must just make sure that the financing is intact."

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