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this could become, the Cypriot Central Bank Governor Panicos Demetriades said he expected that 10% of deposits would be withdrawn when banks finally open.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

    Comment number 37.

    #20 You can expect the good, honest German to know that he/she should cough up when they have caused the mess in the EZ with the nonsense about not helping others. Bail outs are not gifts. Germany makes a huge profit on them with money it had been given (Debt write-offs, support etc.) Have you lot forgotten what you have done? Bent over backwards??? Oh, and please ask you leaders to stop lying.

  • rate this

    Comment number 36.

    would be most obliged for a brief outline of the causes of the banking
    crisis in Cyprus apart from the 4,5 bn lost from the 'haircut' of the Greek
    state bonds .
    thank you in advance and Best Regards

  • rate this

    Comment number 35.

    What caused Cyprus to crash anyway? I always thought tax havens were full of foreign (black) money, making their economies tick like clockworks... just look at Switzerland. The Cyprus banks must have done some very bad investment deals with their black Russian oligarch deposits, indeed...

  • rate this

    Comment number 34.

    Forget Russia, UK Bases, etc. they are irrelevant.

    What is relevant is that the EU negotiators have completely undermined confidence in both Cyprus's financial systems and
    the Euro itself.

    As confidence in a banking system is absolutely fundamental to financial stability the question has to asked, is this just an act of ignorant stupidity or is another agenda being brought into play?

  • rate this

    Comment number 33.

    Ok so this bank account tax is bad, but at least it's an honest representation of what has happened across Europe.

    Bankers get off scott free, go on to get massive bonus's for losses
    Savers get shafted, taxes go up, and the money is squeezed out in other ways.

    How about for once the banks pay up? They caused the mess.

    But hey, this is capitialism! Public risk, Private profit.

  • rate this

    Comment number 32.

    There's no question of blame. Germany needs to take some responsibility for their actions and choices.

    The choice is clear. Germany either pays for the losses in southern states, or it leaves the Eurozone to die.

    If the Eurozone dies, Germans can hope they still have an export economy and manufacturing jobs once the currency appreciates. You'll be in a trade bloc with Switzerland.

    So, choose.

  • rate this

    Comment number 31.

    Savers' deposits are guaranteed up to 100,000 euros.
    The ECB will "do everything necessary" to bail out eurozone economies.
    The UK people will be offered an "in/out" referendum on the EU in the next parliament.

    Difficult to understand why ordinary citizens don't always trust the political elite......

  • rate this

    Comment number 30.

    1.Chris London

    Come ON Chris.We all follow the EU and so called EZ crises since a long time.
    Not a single country will destroy EU certainly not such a small one like Cyprus.
    And also UK referendum is just a try of the tories to stay in power.

  • rate this

    Comment number 29.

    Blame the Germans, the EU, the USA and anyone else... it changes nothing.

    The fault lies squarely with the wild speculations of bankers.

    People who are still taking huge bonuses and getting off scot-free whilst the rest of us have to pay!

  • rate this

    Comment number 28.

    And the EU leaders want us all to accept more Europe! this way they can secure access to everyones money and when they feel the need access it to meet their own goals or maybe put a fixed EU withdrawing tax on all ATM.s & Cash withdrawals across the EU, now there's an interesting option for them.

  • rate this

    Comment number 27.

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

    Good for the Germans. Neither do I. The wealthy must pay their taxes.

  • rate this

    Comment number 26.

    A run on the Cypriot banks looks inevitable. When the banks open for business on Thursday those customers (Russian and non-Russian) with large balances are sure to want to close their accounts. Closely followed by thousands of those with even modest balances.

  • rate this

    Comment number 25.

    #11 Accept that you ARE to blame . Ask the average European man or woman how they feel about a country that has continually ruined Europe and has been let of the hook again and again. Bail outs (Huge interest loans) are not the same as complete write-offs of debts. (and the little that was left for Germany to pay was spread over a long time). Some honesty and sense and MORAL CORRECTNESS, please.

  • rate this

    Comment number 24.

    When the Icelandic bank Landsbanki got into trouble in 2008, the Icelandic government not only let it go bust, but decided not to compensate the British and Dutch depositors for any of their losses.

  • rate this

    Comment number 23.

    If you let banks go bankrupt there will be rising civil unrest, poverty and broken economies. The poor will struggle. If you pump billions and billions into them... you get the same but the rich are protected. Would letting banks go under really be worse - in the long run? Only if your main aim is to keep the EU alive at all costs.

  • rate this

    Comment number 22.

    Essentially they didn't want to upset rich tax-avoiding crooks so they wanted to steal from ordinary savers.

    Now, to avoid upsetting ordinary savers everywhere, they're considering taking only from the rich tax-avoiding crooks anyway.

    Has someone finally got the message? The economy relies on ordinary people a lot, not so much the rich!

  • rate this

    Comment number 21.

    This is a very clumsy and counterproductive attempt at sapping Russian deposits and thereby trying to push back Russian influence on the perifery of the EU. This will further question the motivations of the EU and the IMF in using financial blackmail and bullying for political aims. (see also Greece, Hungary, etc.)

  • rate this

    Comment number 20.

    It would be nice if people stopped blaming Germany for the errors of others. Germany has bent over backwards to help where it can, but there are limits – and Cyprus has clearly arrived at that limit. One cannot expect the German on the Frankfurt omnibus to cough up his/her hard earned cash every time a place in the sun runs into (predictable) trouble.

  • rate this

    Comment number 19.

    What is a "tax haven"?

    Is it a jurisdiction that specializes in providing attractive regulatory regimes to multinational corporations, allowing such corporations to secure the proceeds of their international operations away from areas of production that are considered less attractive?

    If so, then every European state that ever had a colony is yet a tax haven.

    If not, what's your definition?

  • rate this

    Comment number 18.

    10,000 euros, how you say 50p.


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