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Facing Bailout Tax, Cypriots Try to Get Cash Out of Banks Facing Bailout Tax, Cypriots Try to Get Cash Out of Banks
(about 1 hour later)
ATHENS — In a move that could set off new fears of contagion across the euro zone, anxious depositors lined up at cash machines on Saturday in Cyprus to withdraw money hours after European officials in Brussels required that part of a new 10 billion euro bailout must be paid for directly from the bank accounts of ordinary savers. ATHENS — In a move that could set off new fears of contagion across the euro zone, anxious depositors lined up at cash machines in Cyprus on Saturday to withdraw money hours after European officials in Brussels required that part of a new 10 billion euro bailout must be paid for directly from the bank accounts of ordinary savers.
The move — a first in the three-year-old European financial crisis — revived fears of bank runs elsewhere in the euro zone, especially after a top European official on Saturday declined to rule out similar measures on depositors in countries beyond Cyprus. The move — a first in the three-year-old European financial crisis — revived fears that bank runs could be set off elsewhere in the euro zone, especially after a top European official on Saturday declined to rule out similar measures on depositors in countries beyond Cyprus.
Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus banks in recent years. But even deposits under that amount would be taxed at 6.75 percent, meaning that Cyprus’s creditors will be taking money directly from pensioners, workers and regulator depositors to pay off the bailout tab. Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus banks in recent years. But even deposits under that amount would be taxed at 6.75 percent, meaning that Cyprus’s creditors will be taking money directly from pensioners, workers and regular depositors to pay off the bailout tab.
“What the deal reflects is that being an unsecured or even secured depositor in euro area banks is not as safe as it used to be,” said Jacob Kirkegaard, an economist and European specialist at the Peterson Institute for International Economics in Washington. “We are in a new world.”“What the deal reflects is that being an unsecured or even secured depositor in euro area banks is not as safe as it used to be,” said Jacob Kirkegaard, an economist and European specialist at the Peterson Institute for International Economics in Washington. “We are in a new world.”
Cyprus has been a blip on the radar screen of Europe’s long-running debt crisis — until now.Cyprus has been a blip on the radar screen of Europe’s long-running debt crisis — until now.
Hobbled by a devastating banking crisis linked to a slump in the economy of neighboring Greece, Cyprus on Saturday became the fifth country in the euro union to receive a financial lifeline since Europe’s debt crisis broke out. As the euro zone’s smallest economy, Cyprus had hardly been considered the risk for the euro union that Greece, Ireland, Portugal or Spain were.Hobbled by a devastating banking crisis linked to a slump in the economy of neighboring Greece, Cyprus on Saturday became the fifth country in the euro union to receive a financial lifeline since Europe’s debt crisis broke out. As the euro zone’s smallest economy, Cyprus had hardly been considered the risk for the euro union that Greece, Ireland, Portugal or Spain were.
But the surprise tax by the International Monetary Fund, the European Central Bank and the European Commission to force Cyprus is the first to take money directly from ordinary savers.But the surprise tax by the International Monetary Fund, the European Central Bank and the European Commission to force Cyprus is the first to take money directly from ordinary savers.
People crowding cash machines in the capital, Nicosia, were stunned and angry at the decision. Alerts went out on social media calling for a mass protest in front of the presidential palace, now occupied by Nicos Anastasiades, a conservative who won a landslide victory in late February.People crowding cash machines in the capital, Nicosia, were stunned and angry at the decision. Alerts went out on social media calling for a mass protest in front of the presidential palace, now occupied by Nicos Anastasiades, a conservative who won a landslide victory in late February.
“I’m not surprised that people are trying to get their money out in Cyprus; that is entirely to be expected,” Mr. Kirkegaard said. “They wake up Saturday morning and are told on the radio their bank deposits are at risk.”“I’m not surprised that people are trying to get their money out in Cyprus; that is entirely to be expected,” Mr. Kirkegaard said. “They wake up Saturday morning and are told on the radio their bank deposits are at risk.”
The deposit tax — which is expected to raise 5.8 billion euros — appeared aimed at gleaning large amounts of cash from the bank accounts of wealthy Russians, who have poured deposits into Cypriot banks in the last several years. Chancellor Angela Merkel of Germany, who is facing a pivotal election in September, has been particularly concerned that most of the bailout money could wind up in the hands of Russian gangsters and oligarchs, a fear backed by a recent report by Germany’s intelligence agency. Officials in Cyprus have maintained there is no proof that the Russian cash is of questionable origin. They insist they cracked down on money laundering before joining the European Union. The deposit tax — which is expected to raise 5.8 billion euros — appeared aimed at gleaning large amounts of cash from the bank accounts of wealthy Russians, who have poured deposits into Cypriot banks in the last several years. Chancellor Angela Merkel of Germany, who is facing a pivotal election in September, has been particularly concerned that most of the bailout money could wind up in the hands of Russian gangsters and oligarchs, a fear backed by a recent report by Germany’s intelligence agency. Officials in Cyprus have maintained there is no proof that the Russian cash is of questionable origin.
Because Russian depositors would have to share the burden, it would ultimately relieve Cyprus from the debt burden, by allowing a one-time payment upfront rather than deeper cuts to salaries and pensions or additional privatizations in the future. Parliament still must vote the measure into effect, and was planning to meet in an emergency session on Monday, a nationwide holiday. Given the stunned reaction, though, it was not certain to pass.
The decision to go after smaller depositors was a surprise, but part of the rationale may have been avoiding putting too much pressure on businesses, which hold a large share of the higher-value accounts.
While some economists have fretted that conditions may be ripe for a bank run in other countries, Mr. Kierkegaard said the fragmented nature of Europe's banking system meant that the risk of depositor bank runs in other countries would be limited. “The chance is not zero, but it’s clearly a risk that officials believe is manageable,” he said.
The Cyprus Parliament still must vote the measure into effect, and was planning to meet in an emergency session on Monday, a nationwide holiday. Given the stunned reaction, though, it was not certain to pass. Nicholas Papadopoulos, the head of Parliament’s financial affairs committee, said the decision was “much worse than what we expected and contrary to what the government was assuring us, right up until last night,” Reuters reported.

Nicholas Kulish contributed reporting from Berlin, Landon Thomas Jr. from London, James Kanter from Brussels and Andreas Riris from Nicosia.

Nicholas Kulish contributed reporting from Berlin, Landon Thomas Jr. from London, James Kanter from Brussels and Andreas Riris from Nicosia.