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this could become, the Cypriot Central Bank Governor Panicos Demetriades said he expected that 10% of deposits would be withdrawn when banks finally open.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, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    +1

    Comment number 237.

    The Germans can't have it both ways. If they want the benefits of the Euro (export markets, currency union), they will have to accept the downsides (banking union, transfer union).

    The idea that the Euro can serve to allow the northerners to impose their will on the southerners is ludicrous. It will destroy the EU.

    ECB, Schaeuble, Merkel, they seem like a bunch of incompetent idiots.

  • rate this
    -3

    Comment number 236.

    217 Maria

    "Cut them loose and tell them to fend for themselves
    Let Russia buy them out and they can switch to roubles"

    Hear Hear !
    But as I've pointed out before those of us who remember the misery and poverty Russia left behind in Eastern Europe would think they were mad to choose that path rather than take a step to learn fiscal discipline from the well meaning Europeans

  • rate this
    +2

    Comment number 235.

    "Cyprus bailout: Who messed up"

    All who bought into inflexibility of the Euro.
    Banks & folk left standing when musical chairs of property stopped.

    Any way,
    Because your wife has run off with the post man,
    & some one has stolen your new car
    on the day before you`r made redundant.
    It does not mean to say, your house will not not burn down.

    In other words, its going to get a lot worst.

  • rate this
    0

    Comment number 234.

    Now that the Cypriots can sleep tonight --Russians are flying in to save their money.

    -- must be pretty angry at Cyprus now --15 % and rising could be their share.

    and Greek hearts still beating for Enosis--

    ND, SYRIZA clash over Cyprus crisis´

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_19/03/2013_488686

  • rate this
    +3

    Comment number 233.

    Funny to see all these (supposed) smart commentators and economists FAILED to understand that to take money from bank savings could or would lead to a run on banks.Don't they even remember Northern Rock?If savings in a bank aren't safe they'll be withdrawn.Every saver in Cyprus is waiting on the opportunity to get at their money,so how do the experts who accepted this tax expect to keep Cyprus?

  • rate this
    +3

    Comment number 232.

    Have no fear the EC politicians will support the Euro projectuntil every nation is brought down - even the mighty Germany. Pride will prevent them accepting they got it wrong and are willing to bankcrupt every Euro nation and every person in those nations to try and prove their point. Keeping UK outside of the Euro was about the only thing Gordon Brown got right

  • rate this
    +2

    Comment number 231.

    226 misbegot

    "This should be a red flag to all European savers."

    But who can you trust here? It is said that the failure of cash machines recently "due to technical difficulties" were in fact caused by said
    banks running out of money. What is behind that?
    Anybody who believes their savings are safe in an American bank will be sadly disappointed.
    Don't keep your money in the banks

  • rate this
    +4

    Comment number 230.

    More from the muddled minded morons that inhabit the home for basket cases, otherwise known as the EU. Maybe a good time to bring forward the referendum on membership & get the hell out of it. But be warned, if we did that then the country really needs to pull it's socks up, continue doing as we are will only postpone economic implosion.

  • rate this
    +4

    Comment number 229.

    Apparently, Gazprom has offered to bail out the Cypriot banks in return for mineral rights to the as yet unexploited Cypriot offshore gas fields.

    Surely that would be a much better deal for normal cypriots who then lose nothing, but who cares about them? I'm sure the banksters and politicians are fancying a cut of that for themselves.

  • rate this
    +1

    Comment number 228.

    The Cypriot banks no doubt were trying to make money, be more like the Finns and the Germans. It didn't work. If the banks or their clients were dishonest, there are legal processes to follow. They may be slow, but are preferable to a lynching party.

    We might have learnt from European history that solidarity with those in trouble or defeat is a better solution than kicking them in the ribs.

  • rate this
    +3

    Comment number 227.

    226.misbegot

    "what's the point of an individual saving for retirement if the Government is going to turn around and grab 5% to help out those who never saved"
    Nothing to do with social security, but paying for the bankers that raided and raped the economy to get their little nest eggs.
    This is not the fault of the poor & feckless but of the greedy and unscrupulous ethically challenged!

  • rate this
    +8

    Comment number 226.

    This should be a red flag to all European savers. Get your money out of the bank now ! While I'd understand a tax on interest accrued by my savings, what's the point of an individual saving for retirement if the Government is going to turn around and grab 5% to help out those who never saved. This policy was obviously agreed on in the EU power circles. We can't trust any of them.

  • rate this
    +2

    Comment number 225.

    Well the German Cabinet seems to suffer an inordinate amount of creatures that claim they hold a degree when in fact their thesis was for the most part plagiarized.
    In other words they are not smart enough to earn it themselves...this latest debacle kinds of proves that point!
    It raises the question, did anyone involved from the IMF / EU boast a degree cos this was dumb to the point of barking!

  • rate this
    +1

    Comment number 224.

    This is about Incompetent Govt being forced to Burglarise it's most responsible Citizens to satisfy Unscrupulous Debtors who lent without Accountability.
    Economist D Moyo correctly opined Imposition of Rights & Social pgms before Affordability,is a burden which hinders econ progress.
    Donating 1 Mil Aid/Loan accompanied by 2 Mil in Demands translate into 1M net loss plus Int at best.Not Helpful.

  • rate this
    +6

    Comment number 223.

    Brussels and Berlin, without a doubt.

    Quite what they were thinking when they made this decision God only knows. But it has shown every citizen that the technocrats, pen-pushers and parasites in Brussells and Berlin will ride roughshod over international law and steal from ordinary citizens to prop-up their Dollar-envy wet-dream Euro at Any price.

    Not so much a Federal Europe as a Feudal Europe.

  • rate this
    +3

    Comment number 222.

    Victimising those who 'Save' is an assault on the Fiscally Responsible,giving those who fritter everything a Free-Pass. Of course some don't earn enough to save,but truth is,I cannot afford Lifestyle of many who don't save.
    History says,if this abomination is okay for Cyprus,it will be applied to rest of EU eventually.Imposition on Cyprus alone is no less Prejudicial than Racism.

  • rate this
    +1

    Comment number 221.

    We've squandered all the money - please lend us some more?

    The Cypriots don't have to accept the EU loan terms & don't have to be in the Euro, if they can get a loan on easier terms elsewhere e.g. from Russia or China.
    This is just delaying the inevitable pain.
    Perhaps letting the 'bust' Cypriot banks actually go bust, with an orderly supervised wind down is the most realistic solution.

  • rate this
    +3

    Comment number 220.

    Raf plane to Cyprus carrying million euros for uk military just a ruse. Maybe as much as 200 million pounds as loan to Cyprus if it has to crash out of euro. We are the only eu country that could do this. Cypriot minister on C4 news admitted they may have to issue pounds tomorrow

  • rate this
    +2

    Comment number 219.

    @quietoaktree: I have more interesting things to do than answer your habitually anti-Greek comments. Ask for a job in the Turkish ministry of Foreign Affairs (well, you may have a Turkish passport already....) even though I read much more balanced comments in the English-speaking Turkish press..In my view, you abuse the BBC readers' comment rights: the net value of your comments is ZERO. Bye bye..

  • rate this
    +1

    Comment number 218.

    If you ask me Mr Schaeuble and Angela Merkel now know the Single Currency cannot survive in its present form and they need a means of bringing it down that is not directly attributable to them. Unless all tax rules are the same Europe wide it can never work.
    CYPRUS IS A PIN PRICK TO THE GIANT EURO CURRENCY BALLOON

 

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