Brussels: Faced with mounting public outrage in Cyprus and hostile reaction from global financial markets, the euro zone finance ministers have decided to ease the conditions of a bank levy for small savers, which was agreed last Saturday as part of a 10 billion-euro (13 billion dollars) bailout for the debt-stricken nation.
The ministers of the 17-nation euro group agreed at an emergency conference call on Monday night that small depositors on the Mediterranean island should be treated differently under the bank levy plan approved by all member-nations.
They agreed that the Cypriot government would introduce progressivity in the one-off levy, meaning that it can shift the tax burden from savers below 1,00,000 euro level to large deposit holders.
The finance ministers did not specify how this could be achieved, but one proposal is to increase the levy for deposits of about 1,00,000 euros to more than 12 percent and to introduce a tax-free threshold up to 20,000 euros.
However, the government will have to fulfil its commitment to raise 5.8 billion euros to secure the bailout.
As per the plan agreed last week depositors up to 1,00,000 euros would have to pay a one-time levy of 6.75 percent and those above that level will be charged 9.9 percent.
Their decision unleashed massive protests in Cyprus and and sent shares tumbling in Asia and in Europe.
A meeting of the Cypriot parliament in Nicosia to vote on the bailout deal was postponed twice as the newly-elected government of president Nicos Anastasiades scrambled to get sufficient majority to pass the legislation.
A vote is now scheduled for Tuesday evening and the President, who took over only a week ago, is under intense pressure to announce changes to the tax plan before Parliament convenes.
Fearing a run on banks, the government ordered that banks will remain closed for two more days after Monday's public holiday "to safeguard the stability of the financial sector".
The proposed levy on bank deposits to finance a bailout is unprecedented in euro zone's three year history of bailouts and it sent shivers across the 17-nation single currency area.
Investors were concerned that it could plunge the euro zone into fresh turmoil after several months of relative calm.
Politicians in several euro zone member nations expressed fears that it may set a precedent for future bailouts.
The finance ministers defended the bank levy plan and affirmed that it is a one-off measure.
Together with international financial support, “this measure will be used to restore the viability of the Cypriot banking system and thereby safeguard the financial stability in Cyprus”, President of the euro group Jeroen Dijsselbloem said in a statement after the conference call.
“In the absence of this measure, Cyprus would have faced scenarios that would have left deposit holders significantly worse off,” the statement said.
The latest euro zone bailout is driven by concern that the Cypriot banks are systemic relevant and their insolvency could have a domino effect in the entire euro area.