How the Cypriot government in 2013 agreed to impose a one-time levy on bank deposits.

[Pavilion]

In March 2013, Cyprus faced a severe financial crisis. To secure a bailout package from the European Union (EU) and the International Monetary Fund (IMF), the Cypriot government agreed to impose a one-time levy on bank deposits. This decision was met with shock and controversy due to its unprecedented nature.

Here's a brief overview of how it happened:

1. Background: Cyprus was hit hard by the global financial crisis and was in need of financial assistance to rescue its banks and stabilize its economy. The country's banking sector was heavily exposed to Greek government bonds, which had significantly depreciated in value.
2. Bailout Negotiations: Cyprus negotiated a €10 billion bailout package with the EU and the IMF. As a condition for the bailout, Cyprus had to come up with a significant portion of the funds itself. This is where the one-time levy on bank deposits came into play.
3. Levy Proposal: Initially, the proposed levy aimed to tax all bank deposits, including insured ones, at varying rates. Large depositors (those with over €100,000) were to be hit with a higher percentage, which caused panic among both Cypriot and foreign account holders.
4. Public Outcry: The proposal led to public outrage, with long lines forming at ATMs as people rushed to withdraw their funds. The idea of taxing insured deposits went against the principles of depositor protection in the EU.
5. Revised Plan: Under pressure from the public and the international community, Cyprus revised the plan. The new proposal only taxed uninsured deposits (those exceeding €100,000) in Cypriot banks. This move avoided taxing insured deposits but still raised substantial funds.
6. Parliamentary Approval: The Cypriot parliament voted on the revised proposal, and it narrowly passed.
7. Implementation: The government implemented the one-time levy, with funds withdrawn directly from affected accounts. In exchange, depositors received shares in their banks, which were affected by the crisis.

The Cyprus bailout and the one-time levy were highly controversial and had significant repercussions, including damage to the country's reputation as an offshore financial center. However, the crisis highlighted the challenges and complexities of resolving financial issues in the Eurozone and the broader financial system. It also demonstrated the importance of careful policy implementation and the potential impact on savers and investors in times of economic turmoil.