Around 40,000 Romanians who live in Cyprus and possibly local businesses which chose to incorporate in Cyprus will be affected by the recent decision made by the Cypriot authorities to tax bank deposits exceeding EUR 100,000 by around 10 percent. The measure, which will most likely affect the offshore industry heavily, comes after the European Central Bank's plan to withdraw its financing for Laiki, the second largest Cypriot bank, could have sent the country to the brink of default.

The Cypriot Finance Minister Michael Sarris imposed a 9.9 percent tax on all bank deposits exceeding EUR 100,000, which became a key factor in Cyprus getting a EUR 10 billion external loan. For smaller deposits, the tax will be of 6.75 percent.

The country aims to attract some EUR 5.8 billion, which will be used to recapitalize banks. Deposit holders will receive bank shares to compensate for their cash loss, once the system is recapitalized.

As soon as the measure was announced, people started queuing at banks in an attempt to withdraw their money, but banks were closed and most cash points were depleted of money within hours. Authorities said the amounts which are due to be paid were already blocked by the banks, so people could not transfer or withdraw their money.

Romanian bank Banca Transilvania, which has subsidiaries in Cyprus, told clients that transfers from the bank's accounts in Cyprus to other countries, including to Banca Transilvania in Romania, are temporarily suspended, following the Eurogroup decision. It is yet unclear if the move will affect deposit holders in subsidiaries of foreign banks, as so far only subsidiaries of Greek banks were exempt from this tax. The offshore industry will most likely be affected, and Romania has around 5,100 offshore companies registered in Cyprus.

With around half of Cyprus' EUR 68 billion bank deposits controlled by Russian, Greek and British companies or individuals, there are fears that once banks reopen on Tuesday – after a local bank holiday on Monday – the deposit holders will start withdrawing massive amounts. The decision already sparked criticism from Russian president Vladimir Putin, who said it was unfair and setting a dangerous precedent. Russian citizens account for the majority of the billions of euros held in Cypriot banks by foreign depositors, while Russian banks are heavily exposed to the Cyprus market, which is a favored offshore destination for large companies.

Stocks around the world fell sharply after the Cyprus move was announced, as the tax on deposits raised fears and could cause runs on banks in other European countries, out of concern that this would set a precedent. The Cyprus Parliament is yet to cast its vote on the decision made by the country's Finance Ministry and which had the green light from international financial institutions.

editor@romania-insider.com