Sunday, March 24, 2013

Levy on bank deposits

Cyprus, a tiny Mediterranean island is in throes of a serious financial crisis. It is nicknamed Eurogeddon because it poses a threat to faith in a common currency like the Euro.

If Cyprus had a currency of its own, it could have depreciated the currency and improved its balance of payments and recovered from the crisis. The only solution now is tightening of its domestic belt and to look for aid from the European Central Bank and IMF.

It is estimated that Cyprus needs Euro 17 billion to get bailed out of the crisis. Germany, the most potent Euro power, resists outside assistance more than Euro 10 billion for its own political reasons. This means that Cyprus needs to generate savings to the extent of Euro 7 billion.

This is a tough call. It is proposed to impose a one-time levy of 9.9% and 6.75% on bank deposits depending on their size. More than 40% of bank deposits are held by Russians. Difficult situations may call for difficult solutions. But the problem here is that such a remedy may become a precedent and may discourage bank deposits not only in Cyprus but elsewhere too.

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