FINANCE Minister Michalis Sarris yesterday implicitly rejected a suggestion by the Central Bank chief that a levy be imposed on earnings from bank deposits, saying such a move might hurt confidence in the banking system.
"The cornerstone of confidence in the banking system is the integrity of deposits, so with that in mind, one has to look at whether it could have a negative impact," Sarris told reporters.
Central Bank Governor Panicos Demetriades said in an interview with the Wall Street Journal published on Tuesday that Cyprus could install a special levy on capital gains from bank deposits to finance the restructuring of its banking sector.
Sarris said he had not had the opportunity to discuss the matter with Demetriades.
With its coffers virtually empty, Cyprus’ application for up to €17 billion in aid from international lenders has been complicated by worries about whether the island could ever afford to pay off such loans.
Ideas for making Cyprus’ debt sustainable have ranged from privatisations and securitising potential natural gas reserves to more extreme scenarios - ruled out by Nicosia - of depositors in Cypriot banks paying for the cost of the rescue.
“This is not an issue, which is on the table. It will be catastrophic for Cyprus and the eurozone,” Sarris said.
"I believe that message is gradually getting through, even to those who may have considered it a possibility."
Demetriades, who is a member of the governing council of the European Central Bank, was quoted as suggesting a "special solidarity levy" for Cyprus would only be applied for three years and could generate as much as €150 million a year.
"Taxing 10 per cent of interest income for example would generate a substantial amount of revenue for the government," Demetriades said.
The "special solidarity levy for Cyprus" would only be applied for three years, which would be the timeframe for an international rescue.
"This is not a haircut and it's not a stealth tax. It could be implemented without undermining investors' confidence in the banking system and - unlike a tax - it could also apply to non-Cyprus residents," he said.
Labour Minister Haris Georgiades was more straightforward in pointing out that Demetriades’ comment was a mistake.
“Officials should think twice and three times what we are going to say and this goes for everyone,” he told state broadcaster CyBC. “The need for coordination and understanding before taking positions that bind or make things difficult for our side concerns everyone.”
Georgiades said the government’s position was that deposits should not be touched.
“We want to send a clear message that our banking system will be stabilised and deposits are fully secure,” he said.
The Central Bank sought to play down the issue.
“In the interview, the governor clearly referred to a contribution and not taxation,” spokeswoman Aliki Stylianou said. “We are clearly talking about a contribution that is relatively small because it will be calculated on the interest and not the capital.”
Representatives from the "troika" of lenders - the International Monetary Fund, the European Central Bank and the European Commission - started new contacts in Nicosia yesterday to clinch a deal.
The troika team held a lengthy meeting with Sarris but no statements were made afterwards.
They will also see President Nicos Anastasiades and Demetriades.
Anastasiades yesterday met with bank chiefs to discuss developments.
“We also heard from the banks about the progress regarding their restructuring plans,” Sarris said. “There are specific targets, timeframes that we must meet.”
While eurozone finance ministers have pledged to agree a bailout by the end of this month, little detail has emerged on how the rescue will be financed.
One condition however, would be to carry out a money laundering audit, expected later this month.
The head of Cyprus’ anti-money laundering unit (MOKAS) voiced her optimism yesterday that Cyprus would overcome this obstacle with success.
“We are optimistic because our legislation is very good and it is enforced,” Eva Papakyriacou said after meeting the troika representatives.
“This is the idea, to prove there is nothing in Cyprus, that we are not lagging behind on the matter of enforcing international measures, when compared with other countries.”