EU leaders gamble in Cyprus bank bailout

A billboard promoting a Russian bank in Limassol, Cyprus, November 2012 Half the money in Cypriot banks is thought to be Russian - much of it laundered

Once again - faced with a crisis - Europe's leaders have gambled.

As part of a bailout deal for the island of Cyprus they have decided to impose a tax on savers. It has not been done before in the eurozone crisis, its legality may be questioned and the risks and consequences are unknown. Savers with deposits of over 100,000 euros ($130,000, £86,000) will face a one-off tax of 9.9%. For those with less funds in their accounts the tax will be 6.5%.

This was the price for a 10bn-euro bailout. Without it Cyprus risked defaulting by May.

The Germans, however, were not prepared to support a larger bailout. They suspected that half of the deposits in the island's banks were held by Russians with much of the money being laundered. Rescuing high-rolling Russians could not be sold to German taxpayers.

But there are an estimated 25,000 British residents in Cyprus. Many of them have bank accounts in Cypriot banks. There are 3,500 British troops stationed there with savings in Cypriot banks. It is estimated that British savers have 2bn euros on deposit. They too will see their funds taxed - although Chancellor George Osborne has said he will compensate UK government employees and service personnel.

It shows how sensitive this issue is that the UK government has taken this action. There will be those who say that the government is indirectly funding a eurozone bailout.

Monday is a holiday in Cyprus and the banks won't re-open until Tuesday. Already savers have been trying to withdraw their funds. Although it will be too late to avoid the tax, the banks are expecting a difficult day on Tuesday.

Poor forecasts

The EU commission has said this has no implication for banks in Spain and Italy but a message has been sent. For the first time in an EU state - during this crisis - deposits are being seized.

There are plenty of voices saying this poses a threat to the Cypriot economy. Fiona Mullen, an economic analyst, predicts "the damage will be long lasting. Business and financial services were the only sectors generating jobs and tax revenue."'

Sharon Bowles, who chairs the European Parliament's Economic and Monetary Affairs Committee is appalled. "This grabbing of ordinary depositors's money is billed as a tax," she said, "so as to try and circumvent the EU's deposit guarantee laws. It robs smaller investors of the protection they were promised."

The EU has a poor record in predicting the consequences of its bailouts. Time and again it has under-estimated the impact of austerity. Even though the Cypriot economy is tiny - what will be the impact of this on its GDP? How will the bailout loan be re-paid, or will Cyprus - like Greece, Spain and Portugal - end up facing years of hardship?

Portugal should give the EU Commissioners pause for thought. Only five months ago the prediction was that the economy would shrink by 1% this year. Now the prediction is that it will contract by 2.3%. So its bailout terms have been eased.

Greece is struggling to meet the conditions of its second bailout. There is already a shortfall in the revenue that was supposed to be collected. The governing coalition is fragile and may not survive the year.

Italy is in a volatile mood, facing months without a stable government.

No wonder the former Italian Prime Minister Mario Monti sent a four page letter to other EU leaders warning that "public support for the reforms, and worse for the European Union, is dramatically declining."

At last week's anti-austerity protests in Brussels Bernadette Segol, the General Secretary of the European Trade Union Confederation, said "the doubt about the benefits of the EU is showing more and more...the burden is being put on the people."

Eurozone finance ministers and EU officials have gambled again. Have they saved a small country from bankruptcy and applied a Band-Aid to yet another crisis or have they sent a dangerous message to savers elsewhere?

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 785.

    >"Margaret, you'd blame the Yanks for the extinction of the dinosaurs"
    >And the greed of their banksters who started this debacle

    Funny that Canada as a direct neighbor banks have weathered the crisis quite successfully with few bank failures. But of course its a lot easier to blame someone half a world away for local greed. Keep waving that flag and blaming others for your problems.

  • rate this

    Comment number 784.

    781 QOT

    What do we do with the banks ?

    Do what the Icelanders did - leave them to stew

    Excellent article on the Hansa - shows how much things have changed and yet are still the same in many ways. Nothing in the world could challenge such an orginisation now

    776 "probably laughing all the way to the Turkish banks today"

    What goes around comes around

    Good night

  • rate this

    Comment number 783.

    I have no idea why some guys in the EU hierarchy call Cyprus system-relevant.
    Its economy is smaller than the Saarland's ( in Germany ).
    I think it could have a cleaning effect not to bailout Cyprus.

  • rate this

    Comment number 782.

    758. 2468numerate
    "The banks should have been allowed to go bankrupt, wiping out first the ordinary equity holders, before any then unsecured bondholders, and lastly depositors."

    If the Cypriots reject the European offer, this may still happen.

  • rate this

    Comment number 781.

  • rate this

    Comment number 780.

    776 QOT

    -- If the EU (and/or Euro) breaks up --there will be a new formation formed around Germany (and like minded) -- with everybody again ´knocking on the door´ --for entry"

    Along the lines of the old Hanseatic League? It would serve as an excellent prototype among like minded people. Bound to succeed as a strong market with quality goods not found anywhere else on the globe

  • rate this

    Comment number 779.

    There's no gamble if there is nothing to win and that certainly goes for the Cypriot pawns who held on to the hope that Russian money and exploitation would make the island a gold mine. Greed and complete disrespect for money and its power have caused this. The EU has little to do with any other the graft and I doubt that they have anything to do with secret funds being stowed away by Russians.

  • rate this

    Comment number 778.

    #777 MH

    "I've got nothing against nice,ordinary mom-and-apple-pie Americans"

    -- Like Lucy.

  • rate this

    Comment number 777.

    775 DH

    "Margaret, you'd blame the Yanks for the extinction of the dinosaurs"

    No no, fair's fair - that wasn't them :)

    Just for the lies they're feeding their own people and the hideous mess they have created post WW2 in pursuit of empire building.

    And the greed of their banksters who started this debacle

    I've got nothing against nice,ordinary mom-and-apple-pie Americans

  • rate this

    Comment number 776.

    #774 MH

    -- No problems from the North expected-- although they can be thankful the Greeks and Cypriots prevented EU entry for them --probably laughing all the way to the Turkish banks today.

    ---#775 DH

    -- If the EU (and/or Euro) breaks up --there will be a new formation formed around Germany (and like minded) -- with everybody again ´knocking on the door´ --for entry.

  • rate this

    Comment number 775.

    Margaret, you'd blame the Yanks for the extinction of the dinosaurs.

    One of these days, you are going to have to admit that its your self- protectionist EU that is at fault for the Mediterranean countries going to the wall.

    Even Merkel's stooge Monti is saying that support for the EU is declining. When your chief poodle is turning round and biting, you've had it.

    You've backed the wrong horse.

  • rate this

    Comment number 774.

    769 QOT

    "he was trying to protect status as off-shore financial haven punishing ordinary Cypriots"

    I hope the Turkish north won't be tempted into a little foray into the south to flex their muscles :)

    The City here tried to take a bit of the lucrative Swiss business away from them and burnt their fingers badly. Now the toxic American bankster culture has infected us.

  • rate this

    Comment number 773.

    754 Phfft

    "The Euro is now toxic to the fortune`s of club Mediterranean"

    Not the euro - the different work ethic and willingness to pay one's taxes came between north and south.

    It will be the same in the US when the old divide between the north and south will lead yet again to its downfall. It's only wars and the spoils they brought that have kept it from raising its ugly head yet again.

  • rate this

    Comment number 772.

    If the people with under 100,000 pay nothing the Russians will just pay more. It doesn't matter, they can't get any angrier than they already are. Europe, brace yourself. The Russians aren't going to take this lying down. They're already inventing and selecting your punishment. Whatever it is, it won't be pretty. I wonder if it will be another gas shutoff like they did when Ukraine couldn't pay.

  • rate this

    Comment number 771.

    There's no such thing as a free lunch, and the Cypriots were fooled into thinking their economy would boom forever. Dirty money is dirty money. The Russians played a large part in the Cypriot downfall. They had to put their laundered money somewhere and what better place to hide it than Cyprus? The fact that Cyprus is isolated from the rest of Europe didn't help the.economic run away and fraud!

  • rate this

    Comment number 770.

    There are no free lunches, just lunches you haven't paid for until the bill arrives.I love it when Brits brag that they get "free" medical treatment.Somebody has to pay for everything.So the tab has been run up so high the mighty EU will have to dig into the pockets of old age pensioners and other small people who managed to put a little away for a rainy day.Is the EU that small or that desperate?

  • rate this

    Comment number 769.

    "Several EU officials blamed Anastasiades for insisting on low contributions from uninsured deposits, hurting his country's small savers to protect wealthy depositors, many foreigners.

    They say he was trying to protect Cyprus's status as an off-shore financial haven, even by punishing ordinary Cypriots."

    --interesting !

  • rate this

    Comment number 768.

    This action sets a dangerous precident. If this is enacted without causing social unrest, market & currency collapse then people in other PIIG countries should be very worried. People need to think what they can do to protect themselves from such theft & act swiftly. This could be the house of cards - once 1 goes, all could go very quickly

  • rate this

    Comment number 767.

    The problem with the myth of German industry is like all pyramid schemes it eventually comes to an end.With the PIIGS in default and no credit from Germany anymore to buy more German goods, exports will drop, business tapers off, unemployment rises, and what looked so good will go downhill fast.German goods aren't actually any better than the best from elsewhere, they just had EU to market to.

  • rate this

    Comment number 766.

    764. sieuarlu "Guess who will eventually eat the loss".

    Well, what goes around comes around.

    They will need to be as flexible as the US was, with its Marshall Plan.


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