Cypriot lawmakers late Friday approved bills allowing capital controls to be imposed on the island and the creation of a solidarity fund. Nicosia was also set to introduce a tax on depositors.
The draft laws were among nine bills brought to Parliament. Others included the legislation for the overhaul of the country’s banking sector. The draft laws aimed to appease the troika and fend off a disorderly bankruptcy within days.
Having thought that the creation of an investment fund could raise the 5.8 billion euros being demanded by the European Commission, European Central Bank and International Monetary Fund in order for the lenders to agree to a 10-billion-euro bailout, Nicosia was forced to revise its plans drastically Friday.
The solidarity fund proposal was shot down by troika representatives in Cyprus and Chancellor Angela Merkel, who told German lawmakers that she was against the collateralizing of pension fund reserves.
This sent President Nicos Anastasiades back to the drawing board and on Friday night it appeared his government had returned to the idea proposed by the Eurogroup of taxing depositors.
“There will be painful aspects but the country has to be saved,” said Anastasiades via his Twitter account a few hours before the debate in Parliament began.
Key elements of the latest plan are the resolution of Cyprus Popular Bank (Laiki) and a tax on some deposits above 100,000 euros.
Laiki is to be split into a “good” bank and “bad” bank, with all deposits under 100,000 euros, which are guaranteed by the state, going into the good bank. Nicosia says the resolution of Laiki will save Cyprus 2.3 billion euros.
Cyprus wants to merge the good bank with Bank of Cyprus but this would require recapitalization. Nicosia estimated this would cost 2.2 billion euros, requiring a tax of 20 to 25 percent on deposits greater than 100,000 euros at Bank of Cyprus. This proposal was expected to be voted on Saturday.
The Eurogroup is due to meet in Brussels on Sunday to assess the developments in Cyprus and decide whether Cypriot banks should continue to receive liquidity from the European Central Bank next week, when they reopen.
On Saturday, President Nicos Anastasiades and the island’s party leaders are due to fly to Brussels for talks.