Filling the gap
March 18, 2013
Better to put off bank customers than to continue to ask tax payers to pay for EU bailout packages. The majority of German political leaders defend the key points of the EU bailout package for Cyprus, which will tax bank deposits in order to come up with 5.8 billion euros ($7.5 billion) as part of the 15.8-billion-euro rescue. The EU will contribute 10 billion euros to the bailout.
"In the case of Cyprus, it can't be done without the participation of bank owners and investors in the rescue," German Finance Minister Wolfgang Schäuble told German television, referring to the Cypriot parliamentary vote on the bailout package scheduled for Tuesday (19.3).
German government spokesman Steffen Seibert told a news briefing that the eurozone finance ministers' decision to impose a levy on savers in Cyprus is and will be an exception. The Cyprus solution cannot be compared to other countries, Seibert said. "It will thus not affect them," he added, pointing out the glaring discrepancy between the Cypriot banking sector and the state's economic output.
Controversial levy on small savers
Germany's lower house of parliament must approve the bailout deal for Cyprus for it to go ahead, but it is not at all clear whether the opposition parties will agree to the package in its current form in the Bundestag on Thursday (21.3).
Jürgen Trittin, parliamentary leader for the Greens, demanded that Cyprus close tax loopholes as a further condition of the bailout. Trittin added that in general, it is right to include private investors.
"It has to be clear that it cannot work without a levy on those who have deposits in Cypriot banks," he told German television. "Otherwise, the European taxpayer would have to pay."
The political debate in Germany centers on whether to respect the European deposit guarantee for accounts of up to 100,000 euros. Violating the deposit guarantee would amount to a "suicide mission," the Left Party's Sahra Wagenknecht said, adding such a move lacks a legal foundation.
But finance ministry spokesman Martin Kotthaus sees no breach of law in the requirement that savers with deposits below 100,000 euros pay a 6.7 percent levy, while those above that threshold would take a 9.9 percent loss.
"The deposit guarantee allows for safeguarding 100,000 euros in case of a bank's insolvency," Kotthaus said, adding that the levy can avert the banking sector's - and thus the state's - insolvency.
Germany's opposition Social Democrats (SPD) demand staggering the levy. Carsten Schneider, an SPD budget policy expert, told German radio he would welcome exempting small savers from the tax while "high finance makes a larger contribution to recapitalize the banks."
The government's adjustment program
Schäuble dismissed suggestions Germany had spoken out in favor of including bank deposits below 100,000 euros in the negotiations, pinning responsibility on the Cypriot government, the EU Commission and the European Central Bank (ECB).
The latter, however, disclaimed responsibility. The definition of the agreements is based on the results of the euro finance ministers' negotiations, ECB executive board member Jörg Asmussen stressed on Monday in Berlin. "It’s in the hands of the Cypriot government to decide how to structure the program,” said Asmussen, adding that the ECB only expects the Cypriot government to contribute 5.8 billion euros.
“How the country comes up with the contribution, how its staggered – that was and remains a matter for the Cypriot government to decide,” said German government spokesman Steffen Seibert in Berlin on Monday.
Financial experts were critical of the compromise. German economic advisor Peter Bofinger warned of the fatal consequences of levying depositors' savings to prevent the Cypriot state's bankruptcy.
“This quasi expropriation of investors would not only endanger the Cypriot banking system - it would endanger the financial system in the entire eurozone," the economist told a German newspaper, the Passauer Neue Presse. Bofinger said it could unsettle savers in other countries, who might then clean out their bank accounts.
Moody's ratings agency also warned of a heightened risk of capital flight across Europe, affecting in particular crisis-hit countries like Greece, Portugal, Spain and Italy. The agency noted that crisis management in the eurozone seemed to be lacking a compass: contrary to Cyprus, depositors in Spain were not asked to pay up for the bailout of Spanish banks.