Deposit guarantees only protect against bankruptcy, not levies: EU

BRUSSELS (Reuters) - Guarantees on deposits in the European Union are only there if a bank completely collapses, and does not protect from fiscal steps decided by parliaments, the European Commission said on Tuesday, defending a decision to impose a levy in Cyprus.

The eurozone's demand at the weekend that Cyprus place the levy on bank accounts as part of an emergency financial rescue has created a backlash in Cyprus and prompted many Europeans to accuse Brussels of disrespect for its own rules.

EU law guarantees deposits up to 100,000 euros (S$161,600) per customer, per bank. But Commission spokesman Simon O'Connor said those guarantees only existed "in the event of a bank failure".

"In this case, we are not talking about such a situation, we are talking about a one-off levy which will be applied as a fiscal measure, to all bank accounts in Cyprus," he told a regular briefing in Brussels.

From the streets of Cyprus and on Twitter to radio shows in Belgium, millions of Europeans have protested at what they see as a blatant disregard for ordinary savers, which the Commission said was engendered by confusion over EU rules.

"That is the distinction that we need to make," Mr O'Connor said.

Stunned by the backlash and fearing rejection by Cypriot lawmakers, eurozone finance ministers urged Nicosia on Monday to avoid hitting accounts below 100,000 euros, and instead increase the levy on big accounts, which are unprotected by the state deposit-insurance system.

The European Union and International Monetary Fund are demanding Cyprus raise 5.8 billion euros to secure its bailout.

That is needed to rescue its financial sector, and the international lenders initially agreed on Saturday that Nicosia was to impose a 9.9 per cent one-off levy on deposits held in Cyprus above 100,000 euros and a levy of 6.75 per cent on smaller deposits.

A revised draft bill seen by Reuters would exempt savings under 20,000 euros from the 6.75 per cent levy on deposits of less than 100,000 euros. The government has not explained how it would fill the funding gap this would create.

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