05 March 2013

WSJ: Cyprus central bank head urges solidarity levy

Panicos Demetriades said that Cyprus could introduce a special solidarity levy on interest income and gather €4.5 billion in privatisation receipts to finance its own rescue package, while shrinking its oversize banking sector by 20 per cent in the next three to five years.

Mr Demetriades resisted more radical measures to restore the Mediterranean island's banks to health, such as imposing losses on depositors, and called for more imaginative solutions to keep the size of the country's bailout manageable.

Pumping capital into Cypriot banks would be a major part of the rescue, which eurozone finance ministers said after a meeting late Monday would be ready by the end of March. Germany, Finland and a few other eurozone nations have feared the political cost of bailing out banks that hold billions of euros in deposits from Russia and elsewhere outside the eurozone.

Mr Demetriades said the two biggest obstacles to a deal with the eurozone and the International Monetary Fund are the implementation and oversight of measures to combat money laundering—especially the degree to which Cyprus is willing to share information on its banks—and a firm plan to make the country's debts sustainable.

The proposed scale of the assistance needed—€17 billion—would raise Cyprus' public debt to more than 145 per cent of gross domestic product, according to some estimates, far above the 124 per cent that is the medium-term target for Greece.

"Taxing 10 per cent of interest income for example would generate a substantial amount of revenue for the government", Mr Demetriades said, estimating that it "would generate as much as €150 million a year".

The levy would only be applied for three years, which would be the time frame 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.

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