The Problem with Foreign Aid
Large deposits in the country’s second largest bank will be taxed, and the bank itself will be liquidated
Cyprus has reached an agreement with international lenders to provide financial assistance to the country. This was reported by representatives of the European Union. Under this agreement, the second largest bank in the country will be closed..
The agreement was reached on Monday night as a result of the latest attempt at negotiations between Cyprus and the EU, the ECB and the IMF, held in Brussels.
The agreement provides for the liquidation of Laiki Bank and the transfer of deposits of up to $ 130 thousand to the more stable Bank of Cyprus. Deposits over $ 130 thousand in accordance with EU rules are not subject to insurance and will be taxed, but the amount has not yet been determined.
IMF chief Christine Lagarde said Monday that the Cyprus bailout agreement is a “comprehensive and actionable plan” to help address the economic problems facing the island.. The plan offers “a clear strategy to address the central problem of the banking sector,” she said..
International lenders said that the business model used by the Cypriot authorities to attract foreign investors – including many Russian citizens – through low taxes and liberal financial regulation has failed and should be replaced by another.
The agreement excludes the possibility of imposing a tax on all bank accounts, but depositors may still face losses.
The head of the Eurogroup, Jeroen Deisselblum, expressed confidence that the agreement reached is “much better” than the option to introduce a tax on all savings accounts, which was considered last week.
In the absence of an agreement, this small island in the Mediterranean would face bankruptcy, which could lead to the withdrawal of Cyprus from the eurozone..
Cyprus needs urgent financial assistance of $ 13 billion to avoid bankruptcy.
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