EFTA01122896.pdf

't ,Nattliork "(Timers Mardi It). 2012 Taxing Savers in Cyprus EDITORIAL A European plan could force Cyprus to tax bank depositors as a condition of a bailout in a way that would unfairly punish savers and could do lasting damage to confidence in banks in other euro-zone countries in financial crisis. The country's leaders have a chance to change the agreement and should do so. Under pressure to save its collapsing banking system, Cypriot leaders agreed on Saturday to impose a 6.75 percent tax on deposits of up to 100,000 euros, about $130,000, effectively abrogating the insurance that depositors had been promised on balances up to that amount, and a 9.9 percent tax on larger deposits. In exchange, Europe and the International Monetary Fund would provide 10 billion euros to bail out the country's banks, which have suffered big losses on their holdings of Greek bonds that were written down in a previous bailout. The taxes would contribute 5.8 billion euros to the rescue by taking that amount from bank accounts; customers would get shares in their banks as compensation. Late Monday evening, European officials appeared to give Cyprus more flexibility to change the tax as long as it still raised 5.8 billion euros. In a statement, they said their group "continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below 100,000 euros." The Parliament of Cyprus is expected to debate and vote on the tax on Tuesday; it should move to eliminate the tax on account balances lower than 100,000 euros while raising it for larger amounts. Banks have been closed until at least Wednesday to prevent a potential run. Any tax on smaller accounts would set a terrible precedent. Savers in other troubled economies like Italy, Spain and Greece are now justifiably worried that their deposits may someday also be stripped of protection. European leaders have said that taking money from Cypriot bank deposits is a singular event, but this assurance will ring hollow in light of their poor track record in dealing with the euro crisis. The plan has now given savers in Spain, Italy and other countries incentive to withdraw money from their national banks or move it out of the country if they have offshore accounts. Imposing a bigger tax on deposits of more than 100,000 euros would not have the same ripple effect on confidence. A large percentage of those deposits belong to Russian businessmen, some of whom have reportedly laundered money through the island's banks. These sophisticated investors were well aware of the risks they were taking by putting their money in offshore accounts, and Cyprus should not try to protect them at the expense of local depositors. Page I 1 of 2 EFTA01122896 Cypriot officials created this catastrophe by relying on a lightly regulated banking industry to drive up its growth rate while encouraging foreigners to use the island as a tax haven. European officials also deserve blame for not requiring more capital in euro-zone banks and for not anticipating the consequences of lowering the value of Greek bonds. They should not add to those mistakes with a punitive package that is disastrously counterproductive. Page I 2 of 2 EFTA01122897