It has not been a good day to be a bank depositor in Cyprus, a country that shares a currency with Germany because as we all know, one size fits all.
The European Union agreed on Saturday to a €10 billion bailout of Cyprus to rescue the country’s outsized banking sector and avoid a default. The bailout, while small compared to the emergency loans supporting other troubled European nations like Greece, represents more than half the size of the €18 billion Cyprus economy.
Cyprus is the EU’s smallest state, accounting for just 0.2% of output. But experts were worried that a default could destabilize the European financial system. Indeed, the problem in Cyprus is the banking sector, which is several times the size of its economy.
How did that happen? Well, not least, this (Reuters reports):
Russian banks had between $30-$40 billion in cross-border loans to Cypriot companies tied to Moscow and around $12 billion on deposit with Cypriot banks at the end of last year. There is a risk that some $19 billion may not be recovered, Moody’s said. Cyprus is a favoured offshore centre for Russian big business, thanks to its low taxes and light regulation. It ranks as the largest source of foreign direct investment into Russia – money that is largely Russian in origin.
And this bail-out comes with a sting. As usual Open Europe has the goods, but focus, in particular, on this (my emphasis added):
And this bail-out comes with a sting. As usual Open Europe has the goods, but focus, in particular, on this (my emphasis added):Overnight, the Eurozone and Cyprus took the unprecedented step of announcing a tax on depositors in order to raise the necessary funds to recapitalise Cypriot banks and reduce the cost of a bailout.
Here are the details of the plan:
One-time 9.9% levy on deposits over €100,000/6.75% levy on deposits below that level/Cypriots hit by the deposit levy will be given bank shares of equal value/Increase in corporate tax rate to 12.5% (from 10%)/€1.4bn in privatisations/€10bn bailout loan (likely including the IMF)/Cypriot debt to GDP to be at 100% in 2020
The seizure of deposits will happen over the weekend, while there is conveniently a bank holiday on Monday in Cyprus. Depositors will be unable to move funds, even electronically, before the move is complete on Tuesday….
But aren’t all bank deposits below €100,000 in the EU guaranteed? Well, yes. But as with all guarantees, what counts is the financial strength of the guarantor. And the EU’s bank guarantees are (quite correctly) a national matter. That means that in Cyprus, the €100,000 is guaranteed by a state that is out of money. Oh.
What now? Open Europe notes:
By many accounts, Germany entered the negotiations with a radical stance, arguing from the start for a large hit to depositors. It is clear that, with elections looming, the German government is no longer willing to simply foot the bill to avoid contagion. This could be a very important turning point for the Eurozone crisis.
Seen from the perspective of its abused taxpayers and betrayed voters, Germany’s stance is understandable enough. Nevertheless if a bank panic (arguably a perfectly prudent response) spreads beyond Cyprus to, say, Italy, insisting that small depositors take a hit may prove a very expensive way of making a point. How much better to admit that maintaining Europe’s vampire currency on its present basis will sooner or later prove unsustainable: either shred even more of what little is left of EU democracy and move deeper into the swamp of closer fiscal union, or look for saner, more decent alternatives. And yes, those include the Northern Euro.
It’s going to be a long weekend.