Taxing the Poor (to Protect the Rich)

Abstract

At his first Eurogroup meeting, held in Brussels on 4 March 2013, Michael Sarris , the new finance minister of Cyprus , was faced with some tough facts.

Appendices

Appendix 1

Eurogroup statement on Cyprus 4 March 2013

The Eurogroup welcomed the new Cypriot Finance Minister, Michalis Sarris, and the information he provided on the situation in Cyprus following the presidential elections and on the policy intentions of the new government. The first exchanges with the new Cypriot government have been useful. With the new government now in place in Cyprus , the Eurogroup is confident that a swift conclusion of the negotiations towards a Memorandum of Understanding can be reached.

The Eurogroup welcomes the commitment of President Anastasiades, reiterated by Minister Sarris, to closely cooperate with Cyprus ’s European partners towards the earliest possible completion of the loan agreement. For its part, the Eurogroup reiterates its readiness to assist Cyprus in its adjustment effort, including of its banking sector, in order to bring the economy to a sustainable growth path with sound public finances and to safeguard financial stability .

The Eurogroup has been informed that the preparatory work for concluding a Memorandum of Understanding is advanced and that the new government has agreed on an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions.

The Eurogroup called on the international institutions and Cyprus to accelerate their work on the building blocks of a programme and agreed to target political endorsement of the programme around the second half of March.

The Eurogroup will reconvene again in the near term in view of the progress of the discussions between the Cypriot authorities and the international institutions.

Appendix 2

Eurogroup Statement on Cyprus 16 March 2013

The Eurogroup welcomes the political agreement reached with the Cypriot authorities on the cornerstones of the policy conditionality underlying a future macroeconomic adjustment programme. The programme will be based on ambitious measures to ensure the stability of the financial sector, determined action to carry out the required fiscal adjustment and structural reforms to support competitiveness as well as sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances.

The Eurogroup welcomes the Terms of Reference for an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions, involving Moneyval alongside a private international audit firm, and is reassured that the launch of the audit is imminent. In the event of problems in the implementation of the framework, problems will be corrected as part of the programme conditionality.

The Eurogroup commends the Cypriot authorities on the steps already taken to adopt fiscal measures agreed with the Commission, in liaison with the ECB and the IMF . This notably concerns the adoption of consolidation measures amounting to 4 1⁄2% of GDP. The Eurogroup welcomes the Cypriot authorities’ commitment to step up efforts in the area of privatisation.

The Eurogroup further welcomes the Cypriot authorities’ commitment to take further measures mobilising internal resources, in order to limit the size of the financial assistance linked to the adjustment programme. These measures include the introduction of an upfront one-off stability levy applicable to resident and non-resident depositors. Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders . The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.

The Eurogroup is confident that these initiatives, as well as a strict implementation of the agreed policy conditionality, will allow Cyprus ’ public debt, which is projected to reach 100% of GDP in 2020, to remain on a sustainable path and enhance the economy’s growth potential. The current fragile situation of the Cypriot financial sector linked to its very large size relative to the country’s GDP will be addressed through an appropriate downsizing, with the domestic banking sector reaching the EU average by 2018, thereby ensuring its long-term viability and safeguarding deposits. Moreover, the Eurogroup welcomes that an agreement could be reached on the Greek branches of the Cypriot banks, which protects the stability of both the Greek and the Cypriot banking systems, and does not burden the Greek debt -to-GDP ratio.

Against this background, the Eurogroup considers that—in principle—financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro area as a whole by providing a financial envelope which has been reduced to up to EUR 10bn. The Eurogroup would welcome a contribution by the IMF to the financing of the programme.

The Eurogroup calls upon the authorities and the Commission, in liaison with the ECB , and the IMF to swiftly finalise the MoU . The Eurogroup will review the programme documentation prepared by the Commission, in liaison with the ECB , and the IMF as well as the ESM once it becomes available. The relevant national procedures required for the approval of the ESM financial assistance facility agreement will be launched.

The Eurogroup expects that the ESM Board of Governors will be in a position to formally approve the proposal for a financial assistance facility agreement by the second half of April 2013 and subject to completion of national procedures.

Appendix 3

18 March 2013 Statement by the Eurogroup President on Cyprus ¹⁰

The Eurogroup held a teleconference this evening to take stock of the situation in Cyprus .

I recall that the political agreement reached on 16 March on the cornerstones of the adjustment programme and the financing envelope for Cyprus reflects the consensus reached by the Cypriot government with the Eurogroup . The implementation of the reform measures included in the draft programme is the best guarantee for a more prosperous future for Cyprus and its citizens, through a viable financial sector, sound public finances and sustainable economic growth.

I reiterate that the stability levy on deposits is a one-off measure. This measure will—together with the international financial support—be used to restore the viability of the Cypriot banking system and hence, safeguard financial stability in Cyprus . In the absence of this measure, Cyprus would have faced scenarios that would have left deposit holders significantly worse off.

The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000. The Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on 16 March, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance up to EUR 10bn.

The Eurogroup takes note of the authorities’ decision to declare a temporary bank holiday in Cyprus on 19–20 March 2013 to safeguard the stability of the financial sector, and urges a swift decision by the Cypriot authorities and Parliament to rapidly implement the agreed measures.

The euro area Member States stand ready to assist Cyprus in its reform efforts on the basis of the agreed adjustment programme.