Few winners in Cyprus deal

 
Protester casts a shadow onto a Cypriot flag in Nicosia on 24/3/13 Uncertainty lies ahead in Cyprus as the implications of the deal become clearer

After 12 hours of negotiations, a deal was done in Brussels which protects Cyprus from bankruptcy.

It will stay in the eurozone and will receive a 10bn euro bailout.

Its rescue comes with a heavy price.

The battle to protect its business model as an offshore financial sector has been lost.

The German government in particular had opposed a model which attracted foreign investors with high interest rates and low regulation.

Afterwards, German Finance Minister Wolfgang Schaeuble said: "It was the result the German government always stood for."

In order to qualify for a rescue, Cyprus had to raise 5.8bn euros. It has done that by closing the Laiki (Popular) Bank. Further funds will be raised from tax increases and privatisations.

With the closing of Laiki Bank, thousands of bank workers will be without a job.

Bondholders and those with deposits of more than 100,000 euros ($130,000; £85,000) face significant losses; perhaps 40% or more. Their accounts will be frozen immediately and used to pay off the bank's debts.

Large depositors at the Bank of Cyprus - the island's largest bank - will face very severe losses. The details have yet to be worked out. This is where most of the Russian funds are.

All bank accounts with under 100,000 euros in them have been protected from any levy or one-off tax.

Tarnished reputation

As with other eurozone bailouts, the rescue is likely to deepen the recession and increase job losses. It combines austerity with the severe pruning of one of the country's key industries.

Start Quote

To all those who say we are strangling an entire people... Cyprus is a casino economy that was on the brink of bankruptcy”

End Quote Pierre Moscovici French finance minister

The EU's Economics Commissioner, Olli Rehn, said "the near future will be very difficult for the country and its people".

Days of uncertainty lie ahead.

It is not clear whether the banks will reopen on Tuesday. Neither is it known when restrictions on cash withdrawals will be lifted or what capital controls will be left in place.

There will be big, and innocent, losers.

What happens to the person who parked more than 100,000 euros in an account before buying a property or before paying foreign suppliers?

There will be much confusion, much argument, as the detail emerges and is argued over. The rescue, certainly in the short-term, will hit the Cypriot economy hard.

Cyprus has been saved but at what price?

Certainly in the country itself it is widely believed they have been treated unfairly.

French Finance Minister Pierre Moscovici said: "To all those who say we are strangling an entire people... Cyprus is a casino economy that was on the brink of bankruptcy."

The deal has left the eurozone's reputation tarnished.

It was prepared initially to tax small depositors, despite guarantees of protection; there is the perceived bullying of the European Central Bank and Germany; there are renewed doubts that such disparate countries can be held together in a monetary and economic union.

In Cyprus itself, it is very easy to find people who want to leave the eurozone when the time is right.

But for the EU, the risk of a country leaving the eurozone has gone away and with it the risk of contagion.

For Brussels that is a prize enough.

 
Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    -6

    Comment number 35.

    When 'The Decline and Fall of the European Union' comes to be written, the financial scale of this episode may be seen as small but the extent of the coercion by those seeking to defend the indefensible will be the start of the final chapter.

  • rate this
    +3

    Comment number 34.

    Cypriot banks are only in the state they are because of having to take a 5billion haircut on Greek debt forced on them by the EU whilst the EU themselves refused to take the same haircut & share the pain.

    Cyprus is now up to its eyeballs in debt with a vastly reduced means (size of economy) to pay for it. All I can see for Cyprus is years of a downward spiral into poverty like Greece.

  • rate this
    -4

    Comment number 33.

    Its still robbery without violence what ever way you look at it and this situation will now take precedence across the whole of Europe.
    So what people should be asking is how safe is our money as its now clear that the EU can just take it.
    Its the euro that is causing the problems in the smaller countries that's why the UK government refuse to join the euro.

  • rate this
    +22

    Comment number 32.

    10.Dave_Lanc & 11.David C

    The Cypriot Parliament has ALREADY passed laws in the last few days that make the required acts legal, so the Executive has the needed authority to decide.
    If other actions had been required that were not already legal, the Parliament would have had to pass new laws--but that would have meant missing the deadline.
    Prejudices will not let one understand the situation.

  • rate this
    -2

    Comment number 31.

    jaswebb @24
    "last laugh"?

    Any 'benefits of inequality', any 'laugh at chaotic end', at expense of all

    Even in stratosphere we hit 'air pockets'. No money can buy perfect adviser, rich not to fall over tax cliffs, poor not to trip badly at benefit thresholds, reduced to desperation, beggary & worse

    What of house-movers, 'value in transit', to be taxed @40%

    Reset: for Stable Equal Partnership

  • rate this
    -18

    Comment number 30.

    The Euro finance ministers always manage to frighten everyone with terrible forecasts of what would happen if a country left the Euro zone. I don't believe them. They do this to protect their own interests. A great pity Cyprus hadn't left and returned to strength and proved them wrong once and for all. One again the 4th Reich wins.

  • rate this
    +3

    Comment number 29.

    We've heard about all the pain that bondholders, depositors, employees will have to bear. And it's not news really. Since the beginning of this crisis everybody suffered. Everybody but the guilty that is.
    So please tell us about the pain of the bank's shareholders and managers. When are their "deposits" going to be raided?

  • rate this
    +1

    Comment number 28.

    Different countries/governments/cultures with same currency plus Thatcherite style Casino banking on a grand scale does not/can not work. And when we will learn here in the UK as Osbourne seeks to stimulate the 'housing market' (i.e. a money-lending scheme for the benefit of the banks- little to do with home ownership) as a route to UK solution.

  • rate this
    +20

    Comment number 27.

    1.euroflux
    If the banks "investors" deposited their money in had simply and disorderly gone bankrupt, most of that money would have evaporated. The €100,000 guarantee is still in place. "Investors" should be wary where they put their money in, shouldn't they?
    The Cypriots are going to pay for the deeds of financiers who gambled away their substistence. They should be helped, not the speculators.

  • rate this
    +5

    Comment number 26.

    Other behind the scene happy winners are London financial sector, Switzerland, and other offshore financial centers and tax havens.

  • rate this
    -7

    Comment number 25.

    'One key element of the deposit tax, demanded by the IMF, is that it should not require approval by the Cyprus parliament'

    A truly horrifying statement. With the effective coup d'etat of Monti in Italy, this completely undermines the supposed democratic principles of the EU. I am pro-Europe, but I find it increasingly hard to support an EU that engages in autocratic, supranational governance.

  • rate this
    +8

    Comment number 24.

    Will the poor & disabled have the last laugh in this on-going financial crisis: watching the rich having their bulging bank accounts plundered, if this policy is enforced across Europe?

  • rate this
    0

    Comment number 23.

    It's worth pointing out that besides Cyprus there are tax shelters in other European countries where EU citizens can hide their ill-gotten/untaxed money

    E.g. Acc. to recent discoveries many rich Germans have stashed their money in Switzerland and Lichtenstein for years.

    And are now moving them to safer places (outside Europe). Just like those with over 100K euro accounts - from Cyprus.

  • rate this
    +1

    Comment number 22.

    Great analysis Gavin. Usual story of the few trashing things for the many. But Cyprus is strong: stronger than the Finmans think, and it will rebound.

  • rate this
    +10

    Comment number 21.

    Frankfurter Allg. Zeitung now reports that in the last week extra-ordinary high amounts have flown (escaped) from Cyprus. As it turns out some have won.

    I assume, the Cyprus public will get an opportunity do discuss how it was possible for this capital to escape at the time when Cypriots from bank automats can draw 100 Euros a day .

  • rate this
    -1

    Comment number 20.

    Dont suppose Schaeuble knows what sort of economic model the Cypriots should now follow? To those who say "Go back to making things" that only works if you can find enough people to work at Chinese or Indian pay rates and lack of welfare.

    Good luck with that!

  • rate this
    +8

    Comment number 19.

    Well what a surprise - there in fact WAS a way to make bondholders/shareholders pay and protect those with modest savings under the European Compensation scheme.
    Why did they try the levy in the first place? Because they thought they could protect the richer people thats why.
    This is a good result for a change and the pain fell where it should.

  • rate this
    +6

    Comment number 18.

    Its not the cypriot government thats bankrupt, its the two main banks. I think letting the two banks go to the wall would have been a far cheaper option for cyprus

  • rate this
    +19

    Comment number 17.

    This solution achieves the greatest good for the greatest number of citizens of Cyprus. The previous extraction from deposits under €100,000 was a serious error by the elite. That has been reversed and a bank has gone to the wall, another achievement. The off shore banking had to end, and perhaps it will in Cyprus. It remains a bane upon governments and 99% of the tax payers.CASINO gone bust.

  • rate this
    -4

    Comment number 16.

    12 mh
    "Cyprus took itself to the brink"
    No, a small clique within Cyprus took it to the brink. A clique made up of politicians, supported by bankers and EU autocrats all intent on their own agenda with little thought for the consequences to normal business's and hard working citizens.
    This is a massive decade long abuse of power with normal citizens paying the bill

 

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