Cyprus‘ eurozone partners and the IMF agreed early Saturday to bail out Cyprus to the tune of €10 billion ($13 billion) — largely to prop up its flailing banking industry. But the deal, as usual, comes with strings attached. The one causing the most consternation is a levy on bank deposits held in Cypriot accounts. Here’s a look at how that will work — and the problems it may pose.

HEY, HOW CAN THEY DO THAT?

Currently, all 17 European Union countries that use the euro offer deposit insurance to protect customers if their bank fails. But the measure in the Cyprus deal is a tax — not losses incurred because of a bank failure. In fact, it’s meant to hold off a bank collapse. Countries have the right to raise or lower taxes whenever they want. Just ask the residents of Greece, Portugal and Ireland — all bailout recipients — who saw their tax bills skyrocket as those countries tried to reduce their debts. But Cyprus is charting new ground here, and there could be legal — and political — challenges.

AND HOW EXACTLY WILL THEY DO THAT?

Banks have already acted to seal off the amount of the levy — a 6.75 percent tax on deposits under €100,000 and 9.9 percent on those above — so depositors can’t access it. Bank customers still can draw on the rest of their funds via ATM machines this weekend, and nervous depositors did that on Saturday to drain their accounts. But the few banks that opened on Saturdays did so only briefly, and no international transfers will be able to go through until Tuesday, since Monday is a holiday. Cyprus‘ Parliament is expected to meet Sunday to pass the required legislation. The deal also needs the approval of several eurozone parliaments; it’s unclear how fast they can act and what will happen to bank deposits in the meantime.

HAS THIS EVER HAPPENED BEFORE?

So far in the euro crisis, depositors have been protected. But in the 1990s, Italy levied a tax on every bank account to stave off the collapse of its lire currency. The rate, however, was minuscule — 0.06 percent — compared to what Cyprus is enacting. Iceland — another island with an outsized financial sector, although worse weather — also relied on depositors to prop up its banks. When the crisis hit there in 2008, …read more
Source: FULL ARTICLE at Fox World News