Germany wanted a “dramatic haircut” on baking deposits seeking to destroy Cyprus as a financial centre, Former Minister of Finance Michalis Sarris has said.
Sarris, who as Finance Minister attended the crucial Euro area Finance Ministers meetings on March 16 and 25, 2013, which decided on imposing a haircut on banking deposits in Cyprus, testified onThursday in Nicosia before the investigation committee on the economy.
On March 25 Cyprus and its international lenders, the European Commission, the European Central Bank and the IMF agreed on a €10 billion bailout featuring a haircut on uninsured deposits (over €100,000) in a bid to replenish the depleted capital of the island`s two largest banks, which posted massive losses following the haircut of the Greek sovereign debt. Following the agreement, Cyprus Popular Bank will be wound down while its good part will be folded in Bank of Cyprus, while strict capital controls have been imposed ever since, hampering economic activity.
Asked whether he believed that Cyprus` Euro area partners wanted to destroy Cyprus` image as a financial centre, Sarris replied: “Yes. The Germans believed that this is something not natural which was related with money laundering,” adding that “they (the Germans) wondered how such a small country, like Cyprus, with no industrial output, could have such prosperity.”
Asked whether the haircut on deposits below €100,000, which was proposed on the first Eurogroup meeting on March 16 was contrary to the EU directives, Sarris said that it was the European Union which proposed a haircut on insured deposits.
The March 16 Eurogroup decided on a 6.7% haircut on insured deposits and a 9.9% on deposits over €100.000 which sparked reaction in other EU member-states as this was considered illegal by EU directives that guaranteed deposits below €100,000. The Cypriot House of Representatives convened the week between the two Eurogroup meetings, rejecting the Eurogroup’s decision on the 16th of March.
“We were in a dramatic situation. The Germans sought a dramatic haircut on banking deposits. They believed that because Cyprus deposits received high interest rates, (a haircut) could be seen as taxation in retrospect,” he said.
Sarris also noted that following reactions against the haircut on insured deposits, the IMF and the European Union informed the Cypriot government that they sought to increase the haircut on uninsured deposits from 9.9% to 15.6% leaving insured deposits untouched.
Asked by the Committee whether Cyprus argued against imposing a haircut as this would violate Cyprus` constitution, Sarris said “sadly the Europeans were not interested in such issues”, noting that they responded that the constitutions can be amended.
