The Problem with Cyprus' New New Deal

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After widespread anger over the plan to tax regular people's bank accounts to pay for a big bank bailout, Cyprus's government reworked to the deal to protect small savers. Unfortunately, the new tax plan is unlikely to change anyone's mind about the fairness of having their savings taken away.

To quickly recap, it was determined over the weekend that Cyprus's banks would need a 10 billion-euro package to shore up their financial situation. Much of that would come from central bank loans, but the biggest chunk—about 5.8 billion euros—would have to be raised by the government in Nicosia. To make up the bulk of the shortfall, the government would drop a one-time tax levy on all bank deposits, including those that are supposed to be fully insured.

The original plan was to tax everything above 100,000 euros at 9.9 percent, and everyone below that mark at the lower rate of 6.75. (100,000 euros being the cutoff for the insured limits.) The new version would keep that original plan in place, but exempt all savings below 20,000 euros, protecting the poorest Cypriots from the levy. The problem, as has been noted, is that if other rates in the plan remain unchanged, they'll never raise all of the money needed to meet their share of the bailout.

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The Cyprus parliament was supposed to vote on the revised measure today, but it looks like that vote will be postponed once again, since, at the moment, there appears to be no way it will pass. Even the updated version is deeply unappealing to regular citizens, not to mention the Russians, who have parked billions of dollars worth of deposits into the island tax haven. If the parliament can't approve the deal it will be back to drawing board, where a new plan will have to be devised. Or they can just wait for the whole country to collapse and then pick up the pieces later.

Meanwhile, banks in Cyprus have been closed since last Friday, limiting people to only what they can get out of their neighborhood ATMs. They've held up to threats of a bank run so far, but if everyone decides they'd rather take their money elsewhere, the first day back in business (Thursday, tentatively) will be an interesting one.

UPDATE 12:21 p.m.: The Cypriot Finance Minister has resigned or was possibly fired or quit before they could fire him. That move was to be expected, but the timing is worrisome since he was reportedly going to Russia to negotiate an extension on an earlier loan the country desperately needs right now. Plus, it should be all-hand-on decks to fix the current crisis and they can't afford to lose key government players right now.

And it another tidbit that seems lifted from a James Bond movie, the British government is physically airlifting 1 million euro notes (a currency it doesn't even use) to make sure soliders stationed on the island don't run out of money before (or right after) the banks reopen. They will also repay the soliders for any money lost to the deposit tax, if they're using Cypriot banks.

UPDATE 2:25 p.m.: The Cyprus Parliament rejected the tax on bank deposits by a vote of 36-19.

This article is from the archive of our partner The Wire.