A draft proposal on the table for parliamentary approval on the Cyprus bank levy would fail to meet the target agreed with international lenders, according to Cypriot central bank governor Panicos Demetriades.

The recent draft bill to be submitted to the Cypriot Parliament with a vote originally scheduled for 16:00 London time would block a levy being imposed on deposits of €20,000 or less. The haircut would remain at the originally proposed 6.75% for deposits between €20,000 and €100,000 and 9.9% for larger amounts.

However, Demetriades has warned that the shortfall in revenues from the smaller savings would not be covered by the levies on larger deposits. According to the agreement with the Troika (representatives from the European Commission, International Monetary Fund and European Central Bank), Cyprus agreed to come up with €5.75bn in funds via a levy on bank deposits though the country is free to choose how the costs are distributed.

Although the Eurogroup (Eurozone Finance Ministers) insisted Monday night in its statement that while it supported the decision to treat small depositors differently, Cyprus must achieve the target for the so-called "financial envelope".

IMF managing director Christine Lagarde made similar comments on Tuesday: "We are also obviously extremely supportive of the Cypriot authorities' intentions to introduce more progressive rates in the one-off levy or deposit-share swap within the agreed financial envelope of €5.8bn," she said.

While Demetriades told the Cypriot Parliament's finance committee that the current bill wouldn't achieve the above-mentioned target, he also warned that "if the draft bill passes, we would see deposit outflows of 10%, or maybe more, in the first few days".

Nevertheless, the central bank chief also said he was in favour of cancelling the levy for all guaranteed deposits below €100,000 as has been suggested by several international authorities, including the Eurogroup. This implies that higher levies would need to be placed on larger deposits in order to maintain the €5.75bn target.

JM

Related share prices