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Cyprus might reduce savings levy on smaller deposits; bailout vote postponed

FXstreet.com (Barcelona) - Eurogroup’s Saturday controversial decision to impose a one-time tax on all bank deposits in Cyprus, as a condition for granting the distressed country a 10 billion euro bailout, has been causing considerable risk aversion on the markets and a sharp fall in the euro on Monday.

Growing public opposition towards the measure and desperate runs on cash machines over the weekend induced the Cypriot government to put forward a proposition of reducing the tax for smaller savers from 6.75% to 3%. A tax of 10% might be imposed on deposits of up to 500000 euros and of 15% on deposits exceeding this amount.

“If the smaller depositors are hit at all, one can't help thinking that this move has crossed a sacred line and that any depositors in any bank domiciled in a country reliant on the largesse of the EU should in theory now think very carefully about alternative places to store money whatever the size of their holdings,” warns the Deutsche Bank team of analysts. “For now one would suspect that markets are calm enough that the contagion will be limited but such a move could easily amplify any future crisis in Europe as the spectre of deposit losses will now be on the table whatever politicians say in advance or whatever insurance scheme is on the table.”

Nevertheless, ECB Governing Council member Jörg Asmussen told Reuters on Monday that the savings levy required from Cyprus is a one-off measure and that it would not be implemented in other Eurozone countries.

The savings levy caused a stir also in Russia, as the wealthy country’s citizens own the majority of the 35 billion euros held in Cypriot banks by foreign depositors. Russian president Vladimir Putin said in the European morning that the measure, if implemented, would be “unfair, unprofessional and dangerous”. The news of a possible reduction of the tax calmed the situation somewhat and Eurozone officials hope that Russia will extend its existing 2.5 billion euro loan to Cyprus for two more years and that it would lower the interest payments.

The Cypriot parliament will not put the bailout to vote today, as Cypriot officials need more time to reach an agreement on the matter. Thus today’s bank holiday might be extended until Tuesday or even Friday, if necessary.
According to Richard Kelly, Head of European Rates and FX Research at TD Securities: “It looks likely that leaders will come to agreement on a plan that will be supported by Parliament, but there is also a significant risk this gets delayed, which would be taken as negative from current market levels. There has also been no talk of further capital controls that may be implemented to restrict domestic withdrawals, with those measures likely driving further negative sentiment.”

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Forex Flash: Cypriot Parliament vote canceled as terms are renegotiated – TD Securities

The bailout to Cyprus is being object of renegotiation so smaller depositors won't suffer the announced 6.75%. “There has been talk of breaking the tax into 3-4 tiers, that could see very smaller depositors avoid any next, a tax around 3.5% for those less than €100k, and then higher rates on those above €100k and a further increase in the rate for those above €500k in deposits”, said TD Securities analyst Richard Kelly, adding that everyone would still receive some sort of equity claim on the banks to offer the prospect that, rather than a tax, this is a forced shift from a demand deposit to a longer-term investment. “Effectively, this is a maturity extension of deposits like you would with bonds”, he concluded.
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