In Cyprus the choice that has been made is in favor of the Euro Area. It is how we have to interpret the vote on the banking sector restructuration and for the solidarity fund. Today a vote is expected for a tax on deposit above € 100 000.
After the failure of the negotiations with Moscow, this option means that the Cyprus as an off-shore banking sector will rapidly become an old story.
So what is the current situation for Cyprus?
After the rejection of the rescue plan by the Parliament, the game has changed and Cyprus will have to choose its preferred development.
Until now, the situation can be perceived as fuzzy. Cyprus is under the shelter of the Euro Area and at the same time has an important role in recycling Russian capital flows. The question which is asked now is to know if these two options are compatible. Continue reading
Cyprus has been helped by the European Union and the IMF. The loan will be € 10bn. This is huge, more than 50% of GDP as Cyprus GDP was € 17.9bn in 2012. This will bring public debt to GDP ratio from 90% to 140%. The requested plan from Cyprus was € 17bn which was too huge to manage. It is not thinkable to have a rescue plan of almost 100% of GDP and then there is a problem of debt sustainability. Even with 140 % there is a strong risk of unsustainability.
The remaining € 7bn will come from privatization receipts and higher corporate taxes for € 1.4bn and the rest will come from tax on bank deposits. From the first negotiation tax rate will be 6.75% for deposits below € 100 000 and 9.9% for deposits above € 100 000. (But since Sunday afternoon there are discussions on this issue to reduce tax rate for deposits below € 100 000 probably at 3 or 3.5% and increase tax rate to 12.5% for deposits above € 100 000. There is still an uncertainty because it is possible to have 2 tax rates: one for deposits between € 100 000 to € 500 000 and one above € 500 000). Continue reading