By Mark Thompson
A planned tax on Cyprus bank depositors as part of a European Union bailout is sending people rushing to ATMs to withdraw cash.
The EU has required a one-time tax of 9.9% tax on deposits of more than €100,000 starting Tuesday, as part of a bailout of the tiny nation. On Saturday, the EU unveiled a €10 billion plan to rescue Cyprus’ outsized banking sector and avoid a default.
It was the first time that the EU has insisted on such terms for bank depositors as part of a bailout. The EU’s bailouts other nations in the last three years, such as Greece and Portugal, have usually been accompanied with strict budget restrictions and led to big losses for bond holders.
The Cyprus Parliament is expected to vote on the plan Monday. If it goes through, people with less than €100,000 in deposits will have to pay a tax of 6.75%.
As Cypriots heard the news of the tax, they started lining up outside of ATMs to withdraw money. Banks have placed withdrawal limits of €400 and many ATMs were running out of cash over the weekend.
Cyprus’ President Nicos Anastasiades tried to calm his nation on Sunday, and convince lawmakers to vote for the bailout plan, which includes the deposit tax.
“A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation,” he said in a speech.
The move is being closely watched by policy makers because of the potential to destabilize financial markets in Europe. The worry is that depositors in other financially weak, or bailed out, nations might fear similar bailout provisions in the future from the EU.