The following is a guest post by my colleague, Theresa Papademetriou, who is the Law Library of Congress Senior Foreign Law Specialist for the European Union, Greece, and Cyprus. Theresa has previously blogged on “New Greek Regulation Designed to Fight Tax Evasion Problem: Will it Work?”
Cyprus, which has been a member of the European Union since 2004 and the Euro zone since 2008, was recently on the brink of financial collapse. Its two major banks, the Popular (Laiki) and the Bank of Cyprus were abruptly closed on March 15, 2013 until further notice. A chaotic situation ensued when on March 16, 2013, the seventeen Euro zone members announced their decision to impose a one-time tax on deposits held in Cypriot banks in exchange for a 10 billion euro bailout by the European Union. The tax would amount to 9.9% for deposits exceeding €100,000 ($130.000) and 6.7% for deposits less than that. The decision was endorsed by the European Central Bank, the European Commission and the International Monetary Fund (IMF). The message was delivered to the Cypriots by their newly-elected President, a conservative leader, Nicos Anastasiades, who replaced the former government of Demetris Christophias with the mandate to secure a bailout. Anastasiades claimed that he had no choice but to accept the deal.
A move to impose a tax on deposits less than €100,000 would have been incompatible with EU law, which guarantees deposits of up to €100.000, specifically Directive 1994/19 on Deposit Guaranteed Schemes (OJ. (L 135) 5), as amended by Directive 2009/14/EC (O.J. (L68) 3). The EU’s guarantee deposit schemes were designed to prevent situations such as the one affecting Cyprus. The rationale behind the guarantee deposit schemes is to curb mass withdrawals from banks on the verge of a collapse but also to mitigate the overall effects of loss of public confidence in banking institutions. Some have opined that the introduction of taxation of deposits, for the first time in the euro zone history, would place at risk and undermine the entire guarantee deposit scheme that the EU has put in place. Roberto Henriques, an analyst at JPMorgan Chase & Co. in London, was quoted in a news article as having written in a report to clients that the new tax “will be the death knell for an EU Common Deposit Guarantee scheme.”
A new EU proposal for a Directive on Deposit Guarantee Schemes is currently under consideration before the EU Parliament and the Council. The proposal aims to provide a more secure legal regime for deposits. It requires that all banks and financial institutions without exception must join a deposit guarantee scheme. The proposal also defines more clearly what falls within the definition of deposits. More importantly, it requires that prior to making a deposit all depositors must sign a form, which will indicate as to whether their deposits are guaranteed. It allows EU Member States to cover deposits arising from real estate transactions and deposits relating to particular life events above the limit of €100,000, provided that the coverage is limited to 12 months. In addition, the proposal gives EU Member States discretion to establish a separate system, apart from the Deposit Guarantee Schemes to protect pensions, certain deposits for social reasons or in relation to real estate transactions for private residential purposes.
Cypriots reacted swiftly and angrily to this measure by storming ATM machines and banks in a desperate attempt to withdraw their savings. Being a financial center due to its low corporate tax rate and favorable bank interest rates, Cyprus has attracted many Russian investors who deposited large amounts of money in its banks. Mr. Putin called the tax on deposits “unfair, unprofessional and dangerous.” According to an article by Andrew E. Kramer, titled Protecting Their Own, Russians Offer an Alternative to the Cypriot Bank Tax, published on March 19, 2013 by the New York Times, a report prepared by Moody’s rating agency estimated that Russians depositors were in danger of losing about $3.1 billion from a total of $31 billion held in Cypriot banks.
On March 19, the 56-seat Cyprus Parliament voted against a proposed tax on bank accounts irrespective of amount and called it a “bank robbery.” Meanwhile, the Cypriot Minister of Finance, Michael Sarris, paid an emergency visit to Moscow, to request for an additional €5 billion on top of a five-year extension and lower interest on an existing €2.5 billion loan. Mr. Saris did not strike a deal in Russia and Cyprus faced a deadline of March 25 to secure the bailout. The Parliament convened on March 22 to review a bill to reform its banking system. It adopted measures to restrict the amount of funds taken or transferred electronically in order to avoid bank runs. The daily allowed amount of money from both banks is limited to a maximum of €100 or €120.
An article written by Gabrielle Steinhauser, Marcus Walker and Matina Stevis, Bailout Strains European Ties, and published by the Wall Street Journal on March 26, 2013 reported that a new deal had been reached on March 25, 2013, between Cyprus and EU and IMF officials. Accordingly, the Popular Bank will close down, while the Bank of Cyprus will be restructured. Deposits of less than €100.000 in both banks will remain unaffected while depositors with larger deposits are expected to bear a hefty price.
The Cyprus banking crisis may have wider repercussions, as it is anticipated that it will have a negative impact on other Euro zone countries that face similar financial problems. An additional article by Liz Alderman and Landon Thomas Jr., With or Without Bailout, Cypriots Lose Trust in Banks, published by the New York Times on March 25, 2013 reported that Jeroen Dijsselbloem, the Chief of Euro group, had made it clear recently by stating that the idea of reaching private savings to bailout troubled banks will be used as “a template” in similar situations. His statement was later rebuked by Commission officials.
By the time this blog is published, April 3, 2013, Cypriot banks have reopened and public anxiety seems to have tapered off.