How does an island nation with less than a million people, an economy smaller than $23 billion and a GDP worth just 0.2% of the Euro Zone send economic shockwaves throughout the world?
A really, really stupid tax.
After becoming the fourth EU country since 2010 to need a bailout last week (following Ireland, Greece, and Portugal), EU authorities crafted a €10 billion ($13.07 billion) bailout for Cyprus with one huge catch – they won’t get the aid unless they help pay for it with new revenue. The EU says they should do this by imposing a deposit tax on all bank accounts: 10% for deposits greater than €100,000 and 6.75% for lesser amounts. This one-time levy would raise 5.8 billion euros.
The EU has imposed strict terms on bailouts before, such as demanding budget cuts (which negatively affect bond holders and shareholders), but this is the first time bank depositors have been forked the bill. The European Central Bank, France and Germany insist the deposit tax was Cyprus’ idea, not the EU’s. Either way, critics of the plan say this sets a dangerous precedent for the EU, where depositor’s savings were traditionally considered untouchable. Financial analyst Louisse Cooper wrote, “A fundamental safeguard to Europe’s banking industry has been compromised for a tiny country costing 10-20 billion euros to bailout — not a good trade.”
Naturally, chaos ensued after the tax was proposed. Depositors rushed to cash machines to withdraw as much money as possible, emptying many of them. The run was so bad that Cypriot authorities ordered banks to withhold the levy before handing out any cash. On Monday, they had to order banks closed altogether while lawmakers struggled to create a more palatable plan to help pay for the bailout.
At the moment, it looks like banks won’t re-open until Thursday. Meanwhile fears of another debt crisis are climbing, the euro is slipping, protests are popping up all over the country, the US stock market is falling for the first time in weeks, and Russia is really pissed off. Russian companies and individuals have about $31 billion deposited in Cyprus; when loans to Cyprus companies are included, Russia’s exposure is about $60 billion, according to Moody’s estimates. PM Vladimir Putin called the tax “unfair, unprofessional and dangerous.”
A parliamentary vote on some version of the deposit tax is expected by midday on Tuesday, March 19, 2013.
- Cyprus Wins Exemption for Small Savers from Bank Levy (marketcurator.com)
- Will the Cyprus Bailout Cause Havoc in Europe? (gilescadman.vg)
- Euro ministers urge Cyprus rethink (bbc.co.uk)
- Cyprus may delay vote on bank depositor tax, looking at ‘Plan B’ (ekathimerini.com)
- Bailout for Cyprus threatens to backfire (money.cnn.com)
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