Cyprus MPs approve bank deposit tax for stability fund

Members of parliament on Thursday passed an open-ended legislation imposing a 0.095% tax on deposits of banking institutions, saying part of it would help create a financial stability fund.
In one of their final acts before dissolving the House of Representatives next week prior to the May 22 elections, the plenary session approved the bill, with amendments by the centre-right Diko and opposition Disy parties to make this a permanent fund and not just for two years, as proposed by the ruling communist Akel party and the government.
The measure is expected to raise 60 mln euros a year, some 60% of which, or 36 mln euros, will go to the state to help reduce the growing public sector deficit which cannot come down unless the government cuts back on its civil service payroll. The remainder will be directed to a bank stability fund to be created by the Central Bank of Cyprus.
The central bank is drafting regulations to create such a fund, its Governor and ECB Governing Council member Athanasios Orphanides said on March 28. He said the initial target was to build a fund worth around 500 mln euros.
However, Orphanides had earlier expressed concerns about using the bank deposit tax to fund government expenses, preferring instead to use the money for the stability fund alone.
"A financial stability fund is a very important and positive step which will help us deal with any further ratings pressure on our financial system," said Nicholas Papadopoulos, chairman of the House financial affairs committee.
Cyprus's sovereign ratings were recently downgraded by Standard and Poor's, and Moody's, in part because of exposure of the Cypriot banking system to Greek debt and concerns if the government could control its public spending, primarily its huge wage bill.