A plan to seize up to 10 percent of people’s savings in the small Mediterranean island nation of Cyprus sent shockwaves across Europe on Monday as households realized the money they have in the bank may not be safe.
A weekend agreement between Cyprus and its European partners called for the government to raid bank accounts as part of a €15.8 billion ($20.4 billion) financial bailout, the first time in the eurozone’s crisis that the prospect of seizing individuals’ savings has been raised.
Facing outrage, Cyprus’ government delayed a parliamentary vote on the seizure and ordered banks to remain shut until Thursday while it tries to modify the deal to reduce the hit on people with small deposits.
Several hundred people gathered outside the vacant parliament building, with some chanting “thieves, thieves.”
“We’re very angry, betrayed, hurt and extremely disappointed,” said protester Andriana Constantinou.
In order to get €10 billion ($13 billion) in bailout loans from international creditors, Cyprus agreed to take a percentage of all deposits — including ordinary citizens’ savings. The surprise deal stoked fears that deposits in other countries could be targeted.
“The damage is done,” said Louise Cooper of CooperCity, a financial research firm. “Europeans now know that their savings could be used to bail out banks.”
The euro and stocks around the world took a hit even though the Cypriot economy accounts for only 0.2 percent of the combined output of the 17 European Union countries that use the currency.
The Cypriot government is now trying to modify the terms of the original plan and in particular to get a better deal for small savers with less than €100,000. The weekend deal foresaw a one-off charge of 6.75 percent on those savings, rising to 9.9 percent for those above the €100,000 mark.
While trying to make the package more appetizing for those with low savings, the government has to make sure that the total raised remains the same at €5.8 billion.
One solution doing the rounds is to make the tax more graduated: placing a one-time 3 percent levy on deposits below €100,000, rising to 15 percent for those above €500,000.
Still, the government has a battle to get a majority in the 56-member Parliament after some 25 lawmakers from communist AKEL, socialist EDEK and the Green party said they would vote down the levy that they have criticized as disastrous.
The stakes are high for the country of a million people, because a rejection of the package could see the country go bankrupt and possibly out of the common euro currency. Officials also fear a run on Cypriot banks no matter which way the voting goes.