Cypriot lawmakers are expected to consider whether to impose a levy on depositors holding more than 100,000 euros ($129,330) in banks.
Lawmakers on March 19 rejected imposing a levy on savers — but the issue has reemerged as authorities try to raise 5.8 billion euros in order to receive a 10 billion euro bailout.
Parliament late March 22 adopted three measures, including a bill to restructure the Mediterranean island’s troubled banking sector and measures aimed at preventing massive deposit withdrawals, to meet the terms of the bailout.
The Cyprus crisis is expected to be discussed at a euro-zone finance ministers’ meeting on March 24.
The European Central Bank has warned it will stop providing emergency funding to Cyprus if a new plan for handling the country’s debt has not been agreed on by March 25.
Experts say that if Cyprus could no longer receive the emergency funds, the island’s banking sector faces collapse and the country could be ejected from the 17-nation euro-zone.
It would also be likely to trigger broader turmoil across the euro-zone.
Lawmakers are said to be considering imposing a levy of up to 15 percent on bank deposits of 100,000 euros or more.
The earlier proposal, which was rejected, included a tax on smaller amounts of savings, infuriating many Cypriots.
Reports say imposing a one-time levy may be the only way that Cyprus can generate the 5.8 billion euros that is being demanded by the European Union, the European Central Bank, and International Monetary Fund (IMF), which are providing the bailout funds.
A levy would impact wealthy Russians, who are said to have deposited billions of euros in Cyprus’ banking sector to take advantage of the favorable tax amd investment terms the island used to offer.
A bid by Cyprus this week to win financial support from the Russian government failed, leading authorities to put the savings levy back into consideration.
The banking sector had helped spur prosperity on Cyprus for two decades, but financial stability faltered when substantial losses were suffered in connection with the debt crisis in Greece.
In another development, the European Union and Japan have postponed a scheduled summit next week because of the Cyprus crisis. Those talks had been expected to launch negotiations on an EU-Japan free trade agreement.
The ratings agency Moody’s on March 22 downgraded the credit ratings of Cyprus’s top three banks to Caa3, or highly vulnerable to default.
Moody’s Investors Service said the lowering of ratings for the Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank was due to expectations that depositors would suffer losses, the risk that capital controls would be imposed, and uncertainty regarding bank recapitalization plans.
Moody’s said: “The situation in Cyprus remains very fluid and the risk of significant losses has increased, as has the risk of a bank liquidation scenario.”