CENTRAL BANK (CB) Governor Athanasios Orphanides yesterday said he opposed state efforts to impose added taxes on banks to plug the deficit, saying this would further weaken the system and Cyprus image abroad.
Legislation is pending approval in parliament for a 0.95 per cent tax on deposits of commercial banks in a move expected to generate €60 million annually.
Authorities suggest just over half the amount be directed to the state, and the remainder used to prop up a bank stability fund in a one-off arrangement valid for two years.
In a letter to parliament, Orphanides said that while he favoured the creation of a stability fund, he disagreed with taxing banks.
Taxes would “add to a weakening of the banking system and the good reputation of Cyprus as a financial services centre.” A stability fund would help boost an already robust banking system, he said in the letter seen by Reuters.
Orphanides, a member of the ECB Governing Council, said that since authorities had opted for the taxation scenario, the entire €60 million, or €120 million over the two year-period – should be submitted to a stability fund.
As the proposal now stands, €70 million of the total would go to state coffers and €50 million into the fund. Orphanides said once the two-year period lapsed, the stability fund should continue to function independently, he said.
Commercial banks say any tax must be in concert with broader measures to fix fiscal imbalances, and not be used to finance growth in state spending. It also wants assurances that the tax be temporary and valid only for two years.
Speaking after the committee meeting to examine the legislation, Orphanides said: “If the Bank stability fund is constructed in the correct way, we will be able to contribute to improving our banking system’s credibility, even though there are some difficulties in closing certain financial holes.”
Finance Committee chairman, Nicolas Papadopoulos said the creation of the stability fund would be a measure that would help overcome any doubts about the banking system and avert further downgrades of the economy by international rating agencies.
He agreed with Orphanides that the fund should be independent and separate from the state’s budget, and operate within the specifications of the European Central Bank.
Papadopoulos criticised the Finance Ministry for failing to consult with the Central Bank over the bill before tabling it for discussion. A spokesman for the ministry, he added, had now committed to discussing the issue matter with the Central Bank before the committee continues its discussions next week.
