Cyprus is a small member of the eurozone, and it is in deep financial trouble. The causes of the trouble are government mismanagement of its finances, and the local banks’ lousy balance sheets. These arose during the recession of 2009. The EU has agreed to bailout Cyprus, to the tune of 10 billion euro,,but the EU wants a “one-time” levy on all bank deposits, 6.75% for those with under 100,000 euro and 10% for those with more. In exchange, depositors will get shares in the banks and bonds backed by natural gar reserves. Cypriot rage may actually make the EU back down.
The people of Cyprus are more than upset. Parliament was to have voted over the week-end on the deal, but the country is so taken aback by the levy demand that the vote will happen today (maybe). If the deal is defeated, the banks may be closed tomorrow. “The solution we concluded is not what we wanted but is the least painful under the circumstances,” President Anastasiades said on TV. He added, “I bear the political cost for this, in order to limit as much as possible the consequences for the economy and for our fellow Cypriots.”
The trouble is his Democratic Rally party has only 20 seats in the 58-seat parliament, so someone else needs to take some of the blame, too. And the other factions are in no hurry to step into the same cow pie. Opposition leader George Lillikas, an independent, said the president had “betrayed the people’s vote.”
Brussels is starting to notice that there is a problem, Although Germany’s Chancellor Merkel is quite content with the levy (she said “I think it’s a good step which will certainly make it easier for us to approve the help for Cyprus..”), the speaker of the European Parliament, Martin Schulz wants an exemption for those with less than 25,000 euro in the bank. He said in a newspaper interview, “The solution must be socially acceptable.”
The bank account levy is anything but socially acceptable to the people of Cyprus. The levy on accounts is there because the German government, which funds all bail outs in Europe, wanted to make sure its taxpayers didn’t think their taxes were going to help the Russian mob that is laundering its money in Cyprus. As a result of this understandable sentiment, small depositors will take it on the chin, and big bondholders are not touched. This violates simple fairness and European banking principles.
As a result of this proposal, the automatic teller machines (cashpoints in British) are empty. There will be a run on the banks when they open. And if the Cypriot parliament rejects the deal, the eurozone enters uncharted waters.
Here’s an idea, though, for Chancellor Merkel. If the bank shares are such good security, let German banks buy them. The Cypriot banks get funding, and the taxpayers are off the hook. Of course, part of the reason all the banks are getting bail outs across Europe is to avoid forcing the German and French banks to realize losses from lousy business decisions made years ago. Perhaps, the whole point remains trying to cover that up.