Cyprus bailout: Who messed up?

 
Angry Cypriots protesting in Nicosia, 18 Mar 13 Cypriots feel their country is facing a diktat from German and EU officials

Almost nobody now believes the Cypriot bailout deal negotiated in the early hours of Saturday morning was smart.

As the economist Paul Krugman put it, it was as if Europeans were holding up a sign which read "time to stage a run on your bank". In Europe's corridors of power there is the sound and sight of officials pointing fingers and rowing back from previous positions held.

Here's the reality: Cyprus's banks will remain closed at least until Thursday while they try and unravel this. The Cypriot parliament may delay again today voting on a bailout deal that has brought protesters onto the streets. Bank shares in Europe have been under pressure. The markets are unnerved. Fear has returned to the eurozone. The EU's reputation has been damaged.

Not a good day's work.

So what's happening? After a conference call on Monday, Europe's finance ministers said that small savers, who were going to be taxed at 6.5%, should be protected.

A new proposal from the finance ministry has surfaced today. The aim is to better protect the small savers. Under the plan those with savings less than 20,000 euros would pay nothing. Those with deposits between 20,000 and 100,000 would pay a one-off levy of 6.75%. Savings above 100,000 would face a 9.9% tax.

The proposal leaves in doubt whether it could raise the nearly 6bn euros that was a central part of the bailout deal.

And in a further indication of just how complicated this could become, the Cypriot Central Bank Governor Panicos Demetriades said he expected that 10% of deposits would be withdrawn when banks finally open.

The Cypriot government appears to have decided against raising the levy on those with deposits of more than 100,000 euros to over 15%.

Here's the rub: The government fears this would effectively destroy its financial sector. Those wealthy Russians, who are the largest foreign investors, are likely to pull their funds out of the island if the one-off tax is too high. The Russians are angry and the Cypriot finance minister is heading to Moscow to explain.

On verge of bankruptcy

The Cypriots argue that the bailout would end up undermining a key sector of the economy. The suspicion in Nicosia is that it is precisely what countries like Germany want. They don't like tax havens for the wealthy.

Levy basics

  • Depositors with 20,000 - 100,000 euros deposited must pay 6.75%
  • Those with more than 100,000 in their accounts must pay 9.9%
  • Depositors will be compensated with the equivalent amount in shares in their banks
  • The levy is a one-off measure
  • Eurozone wants Cyprus to get 5.8bn euros from deposits, in exchange for a 10bn-euro EU/IMF loan
  • Total of about 68bn euros on deposit in Cypriot banks, foreigners hold about 40% - most of them Russians

So how did Europe get itself into this tangle? As always Germany is the starting point. For Chancellor Angela Merkel there was a moral element to this. "Anyone having their money in Cypriot banks," she said, "must contribute to the Cypriot bailout". In other words it can't just be left to the taxpayers of other countries.

The Cypriots say that the German Finance Minister Wolfgang Schaeuble was a strong proponent of taxing savers. At the talks the IMF also played tough. It insisted that Cypriot debt had to be sustainable and that meant reducing the size of the debt. So depositors were lined up to take a "haircut" - a slice from their savings.

The Cypriots tried to hold out but they were faced with a veiled threat. The European Central Bank (ECB) might stop providing funds to Cyprus's two major banks. Without support, the banks would collapse and bankruptcy would follow.

When the protests started, Mr Schaeuble tried to distance himself from what had been decided in Brussels. He told German TV that it was the European Commission and the ECB that had "decided on this solution and must explain that to the Cypriot people". The Cypriots say it was the Germans who had pushed hard for the levy on depositors. Berlin says "yes" but not on small depositors.

The arguments, no doubt, will continue. The legacy of this will be harder to forget.

Domino effect?

A suspicion will linger in places like Italy and Spain that, although European officials insist this was a one-off deal, depositors elsewhere might face a tax on their accounts.

There will also be the suspicion that the finance ministers were willing to undermine the Europe-wide deposit insurance scheme with a sleight of hand.

The episode also underlines again how much resentment is building in southern Europe towards the north and Germany in particular. Many of the protesters in Nicosia are openly antagonistic towards Angela Merkel and Berlin.

There will be a question whether - as with previous bailouts - the measures adopted will damage the very economy they are intended to save.

Cyprus reminds Europe how dangerous the eurozone crisis remains.

 
Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    +48

    Comment number 17.

    Cyprus and others should follow the example of Iceland. Iceland didn't bail out the bankers. When declared bankrupt the citizens rose up, forcing the prime minister and government to resign.

    They then formed a new peoples government from citizens, wrote a new constitution, and arrested and prosecuted high level executives and bankers who had created and exploited the crash. Well done Iceland.

  • rate this
    +4

    Comment number 16.

    The view seems to be just to tax the big nasty Russian deposits. But what if a few Russians withdraw their billions for the Cyprus bank as soon as they open won't this amount to more money then was raised by this "tax". The bank WILL go insolvent.

  • rate this
    +4

    Comment number 15.

    This euro crisis is just crazy.
    I have to agree with the southern european view point here, in that the economically more powerfull nations, particularily Germany are applying harsh and punative measures on southern europe, enhancing and prolonging this recession. We need investment in commerce and industry, a system that encourages business development, not stiffle it!

  • rate this
    +1

    Comment number 14.

    Why does the EU/EZ allow Germany to get away with either being so short-sighted, or dangerous, or even idiotic? ALL the problems of the EZ have been created by them. Is it the case that they can't see that being in a UNION means accepting there are otherways to solve a problem? They have, of course, decided that Europe is only Germany now they have been helped so much to build their economy.

  • rate this
    -2

    Comment number 13.

    "The suspicion in Nicosia is that it is precisely what countries like Germany want. They don't like tax havens for the wealthy."...

    nice to see somebody stepping up and taking it on, one thing is for sure the current ConLib sham and their paymasters in the tax haven that is the CoL won't be fighting it.

  • rate this
    +2

    Comment number 12.

    The ruling elite rachet up the pain for its people, but themselves demand more money for their budget !

  • rate this
    +24

    Comment number 11.

    Just blame us over here in Germany; it's the easy way out.
    Why not come over here and ask the man/woman in the street how they feel about bailing out time and time again feckless banks and bankers, all bar none in southern European states.

  • rate this
    +11

    Comment number 10.

    Where does the Russian money come from?

  • rate this
    +5

    Comment number 9.

    Re post 4, why do we need bases in Cyprus, so we can attack Syria?

    Let's cast Cyprus adrift, the Russians are welcome to all those British Cypriot tax avoiders

  • rate this
    -1

    Comment number 8.

    6.democracythreat

    German hegemony really.I think in Germany there are already 80% with the wish to see a different movie.
    Just Italian election is not that long ago with a comedian as strongest.If Italy or Cyprus it s up to them to get the house in order.And in case of Cyprus we are talking from a bank bailout from banks
    what didnt invest in Germany

  • rate this
    0

    Comment number 7.

    No mention of gas in this article.

    This is geopolitics, not finance, at play here.

    There are plenty of resources on the internet that explain this, and you don't have to look at the mad conspiracy sites to find the bigger picture.

  • rate this
    -2

    Comment number 6.

    Did anyone else notice the EU flag in the photo for this article, shaped into the form of a swastika?

    I believe the EU will fracture first on the left. The right side of Euro politics (Christian democrat party in various states) are owned by bond holders. The left relies on union support.

    The unions of the south are hurting financially, and they have a history with right wing German hegemony.

  • rate this
    -5

    Comment number 5.

    Germany's willingness to use punitive measures against smaller EU member states will ring loud in the ears of every European nation.

    Germany, and Germans, do not really believe they are the equal of other european people's. They clearly believe they have a superior moral and governmental code. The current decision, remember, was based on German tax policy. It was not based on EU tax policy.

  • rate this
    +1

    Comment number 4.

    Apart from the absurdity of the solution this clearly demonstrates a naivety in International Affairs by the EU. Cyprus whether you like it or not is of strategic significance and if I were Russia I would be offering them all the help they need. Next step Russian naval bases, airfields and UK out.

  • rate this
    +1

    Comment number 3.

    No one "owns" the Euro.

    Draghi talks a good talk but, if push comes to shove, can do little. As it is, a few politicians, up against a deadline and conscious of their own national electorates, pull in all directions and create a mess.

    With each problem, decisions are left to the very last minute then forced out in late or all-night sittings, when minds are blurred by tiredness.

    Crazy.

  • rate this
    +3

    Comment number 2.

    All this emphasises the necessity of strong regulation of the banking sector and the advantage of taking some banks into public ownership. But surely this crisis was inevitable given the extraordinary position of the banking sector in relation to the GDP of Cyprus (not unlike UK, Iceland) but nothing was done until the crisis exploded. The Eurozone have some culpability in this.

  • rate this
    +1

    Comment number 1.

    This is the beginning of the end for the EU. For they along with the IMF have started to treat member states differently rather than as equals. So when the next bail out comes, for one surly wont be long in comming, what treatment can they expect. The total support that the Greeks got or the now varying support that is on a sliding scale. The end is near for this dinosaur.......

 

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