This is sheer insanity and very very frightening.
Cyprus is a small island country in the Eastern Mediterranean Sea to the east of Greece. At 3,572 sq. mi. and an estimated population of a little over 1 million in 2011, Cyprus is the third largest island in the Mediterranean Sea and a member of the European Union (EU) and the eurozone.
The eurozone is an economic and monetary union of 17 EU member states that have adopted the euro (€) as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Most other EU states are obliged to join once they meet the criteria to do so. No state has left and there are no provisions to do so or to be expelled.
The eurozone is represented politically by its finance ministers, known collectively as the Euro Group, and is presided over by a president, currently Jeroen Dijsselbloem.
Like its neighbor Greece, Cyprus is heavily in debt and is teetering on the brink of bankruptcy.
In return for bailing out Cyprus to the tune of $13 billion, the eurozone finance
Michele Kambas reports for Reuters, Mar 17, 2013, that the decision, announced yesterday morning, stunned Cypriots and caused a run on cash points, most of which were depleted within hours. Electronic transfers were stopped.
The originally proposed levies on deposits are 9.9% for bank deposits of more than 100,000 euros (US $130,348 at the current exchange rate) and 6.7% on anything below that. Today, the Cypriot government discussed with lenders the possibility of softening the impact on smaller savers by changing the levy to 3% for deposits below 100,000 euros, and to 12.5% for above that sum, a source close to the consultations told Reuters on condition of anonymity.
Whatever the percentage, the proposed levy is expected to raise almost 6 billion euros and has the “blessing” of a troika of lenders from the European Commission, the IMF and the European Central Bank.
But the levy requires the approval of the Cyprus parliament, where no party has a majority. Originally scheduled for today, the parliamentary vote on the measure was postponed for a day until tomorrow, March 18, to give more time for consultations and broker a deal. If parliament fails to approve the levy, Cyprus President Nicos Anastasiades warns, the island’s two largest banks will collapse, including the Cyprus Popular Bank, which could have its emergency liquidity assistance (ELA) funding from the European Central Bank cut by March 21. A default in Cyprus could unravel investor confidence in the eurozone, undoing the improvements fostered by the European Central Bank’s promise last year to do whatever it takes to shore up the currency bloc.
In a televised address to the nation today, Anastasiades said he had to accept the tax in return for international aid, or else the island would have faced bankruptcy: “The solution we concluded upon is not what we wanted, but is the least painful under the circumstances.”
Elected only three weeks ago, Anastasiades said savers will be compensated by shares in banks guaranteed by future natural gas revenues. Cyprus is expecting the results of an offshore appraisal drilling this year to confirm the island is sitting on vast amounts of natural gas worth billions.
The crisis is unprecedented in the history of the Mediterranean island, which suffered a war and ethnic split in 1974 in which a quarter of its population was internally displaced. With a gross domestic product of barely 0.2% of the euro bloc, Cyprus had applied for financial aid last June, but negotiations were stalled by the complexity of the deal and the reluctance of the island’s previous president to sign.
Making bank depositors bear some of the costs of a bailout had been taboo in Europe, but eurozone officials said it was the only way to salvage Cyprus’s financial sector and promised that the levy would not set a precedent. In Spain, one of four other states getting euro zone help and seen as a possible candidate for a sovereign rescue, officials were quick to say Cyprus was a unique case. A Bank of Spain spokesman said there had been no sign of deposit flight.
International Monetary Fund Managing Director Christine Lagarde said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.
According to a draft copy of legislation, if a bank account holder in Cyprus fails to pay the levy, it would be a criminal offense liable to three years in jail or a 50,000 euro ($65,174) fine.
Those affected will include not just Cypriots but also foreigners who have bank deposits in the island. One of the foreigners is Chris Drake, a former Middle East correspondent for the BBC who lives in Cyprus. He told Reuters, “I’m furious. There were plenty of opportunities to take our money out; we didn’t because we were promised it was a red line which would not be crossed. I’ve lost several thousand.”
British finance minister George Osborne told the BBC on Sunday that Britain would compensate its 3,500 military personnel based in Cyprus.
Many Cypriots, having contributed to bailouts for Ireland, Portugal and Greece – Greece’s second bailout contributed to a debt restructuring that blew the 4.5 billion euro hole in Cyprus’s banking sector – are aghast at their treatment by Europe. As an example, the daily Phileleftheros said Cyprus received a “stab in the back” from its EU partners.
At the same time, however, Phileleftheros and other newspapers also maintain a failure by the parliament to approve will inflict further damage on the banking system. So Cyprus is caught between the proverbial rock and a hard place.
See my also follow-up posts:
- “Eurozone confiscation of Cyprus bank deposits: Fallout & Analyses,” March 18, 2013.
- “Confiscation of bank deposits: Can it happen in America?,” March 19, 2013.
- “Cyprus copycats: NZ and Spain talk wealth tax on bank deposits,” March 20, 2013.
- “The Left approve of stealing your bank savings,” March 21, 2013.