Cyprus Bailout: Parliamentary Approval May Pose Biggest Hurdle

A surprising bailout for Cyprus sent shock waves across the world and renewed concerns of another Eurozone crisis. The European leaders offered €10 billion in rescue funds on the condition that one-time tax is levied on depositors.

A 9.9 percent tax will be levied on bank deposits above €100,000, and 6.75 percent tax on anything below that. It’s the first time in history that savers have suffered the burden, which raised concerns that any future bailout in Europe may follow the same route, taxing the bank deposits.

Cyprus Bailout: Parliamentary Approval May Pose Biggest Hurdle

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According to Deutsche Bank, the levy will raise an estimated €5.8 billion, shifting more than half of the burden of bank recapitalization to depositors. The additional revenue measures including an increase in corporate tax rate from 10 percent to 12.5 percent will lower the bailout package from €17 billion to approximately €10 billion.

The move is expected to bring Cypriot debt/GDP ratio to 100 percent by 2020. However, the deal will have a potentially negative effect on the newly-elected president, says Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) in its latest report.

Cyprian banks have €68 billion in deposits, of which €30 billion has been deposited by people having less than €100,000 in the bank. If approved by the Cypriot parliament, the one-time levy will be applied on March 19. The good news is that savers will be compensated partially by receiving equity in Cyprian banks, the Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) said in its latest report.

Though the exact details aren’t clear yet, the value of equities will be partially guaranteed by the future natural gas reserves.

Parliamentary Approval – The Biggest Hurdle

There will be three events to watch before the deal is finalized – the approval of the deposit levy by Cypriot parliament, extension of the outstanding loan of €2.5 billion from Russia and the German parliamentary approval. The risk for the approval is extremely high. President Anastasiades’ DISY is the only party backing the deal so far. DISY holds 20 of 56 parliamentary seats, so the president must convince his ally DIKO which has 8 seats, and at least one other member to reach the majority threshold of 29 votes.

On the other hand, AKEL (19 seats), EDEK (5 seats) and the Green Party (1 seat) have openly opposed the deal. That leaves the decision of 2 European Party MPs crucial for the deal. The attempts to get the approval have led to demands of change in deposit levies. The Deutsche Bank says that politicians are likely to demand reduced levies for smaller deposits while increased taxes for larger ones. That will sell politically.

Meanwhile, Finance Minister of Cyprus is in Russia to discuss an extension and an interest rate reduction on the outstanding €2.5 billion loan from Russia. The stance of Moscow seems favorable for the extension; however, according to the reports, the Russian finance ministry may demand the details of Russian depositors in Cyprus in return for the extension. That would be a real dilemma for Cyprus.

The German Bundestag is showing positive signs for approval. The German politicians earlier raised a number of concerns. The levy on bank deposits, corporate tax rate increase and auditing the implementation of anti-money laundering measures, all these measures were taken to address the concerns raised by Germany. Still, German approval is uncertain.