Just when you thought it was safe to stop worrying about Europe and move onto other concerns, Cyprus decides to go and remind everyone that the world economy isn’t as robust as we all might wish.
Here’s the story from the New York Times:
Leaders in Cyprus and Brussels and elsewhere in Europe scrambled Monday to contain the fallout from the euro zone’s decision over the weekend to force ordinary bank depositors to share the pain of an international bailout.
Much of the day was given over to cross-border finger pointing and a public reluctance for anyone to take responsibility — some might say blame — for a decision that some analysts worry could cause a run on banks in Cyprus, and possibly in Italy and other troubled euro zone countries. Cyprus, whose banking system is on the verge of collapse, is now the fifth nation among the 17 members of the euro to seek financial assistance since the crisis broke out three years ago.
Members of the Eurogroup, the club of euro zone finance ministers, which finished a bailout plan for Cyprus in the wee hours of Saturday, were holding a conference call Monday evening to talk things through once more. Germany was widely thought to have taken a hard line against Cypriot depositors because of the large volumes of money stashed there by rich Russians. But the German finance minister, Wolfgang Schäuble, was quoted by Reuters on Monday as denying that Germany had pressed for smaller depositors to be taxed as well.
As announced on Saturday, depositors in Cypriot banks with balances of more than €100,000, or $129,500, would have to pay a one-time tax of 9.9 percent on their holdings. Those with balances below that threshold would pay 6.75 percent.
Early in the day Monday, large banks in the Netherlands, Spain and France led stock market declines across Europe. By the end of trading in Europe, most indexes had regained much of the lost ground. And there seemed to be scant carryover effect to U.S. markets — though the euro was down almost 1 percent against the dollar at 1.2957.
The Cypriot president, Nicos Anastasiades, was trying to compel policy makers in Brussels to soften the terms of the deal, saying European Union leaders used “blackmail” to get him to agree to penalize depositors in order to receive a bailout package worth €10 billion.
The Wall Street Journal offered more specific details about the crisis and quest for a deal:
Cyprus on Monday put off for another day a debate on a bank-deposit levy in the Parliament—a precondition to receiving a €10 billion ($13.07 billion) bailout—and said its banks would remain closed until Thursday, as the government sought more time to shore up support for the tax and raced to avert a collapse of its banking sector.
Cyprus Parliament speaker Yiannakis Omirou said Monday that the debate and vote would be pushed back to Tuesday—now two days behind schedule—amid fears of a meltdown in the island’s financial system.
“The parliament will convene at 6 p.m. [Tuesday],” Mr. Omirou told reporters. “The reason is because there now exist amendments to the government legislation that is to be submitted. Consequently, it requires the necessary time in parliament, in the finance committee, to examine these new proposals.”
As negotiations in Nicosia entered a third day, the government was focusing on a new proposal that will aim to raise €5.8 billion for Cyprus’s crisis-hit banks—the same amount already set as a requirement for Cyprus’s bailout—but which would lower the tax on smaller deposits.
According to two European officials familiar with the talks, the new proposal being floated by the government would see smaller depositors, those with up to €100,000, taxed at a 3% rate—down from 6.75% as initially envisaged. Savers with €100,000 to €500,000 would be taxed at a 10% rate; and those with over €500,000 taxed at 15%, one official said.
Global markets weren’t happy with the news, according to the Washington Post:
The situation in Cyprus is a potent reminder of how the political economy of the euro zone remains volatile. Though many analysts feel the worst of Europe’s crisis has past, the prospect of a nation being forced from the currency union remains a possibility and carries an uncertain set of risks.
The United States has little direct exposure to Cyprus. A statement from the U.S. Treasury Department said officials were watching the situation closely and urged “that Cyprus and its Euro area partners work to resolve the situation in a way that is responsible and fair and ensures financial stability.”
World markets dropped modestly Monday and the euro fell against the dollar, but analysts said the real costs may come later if depositors in struggling countries such as Spain and Italy question whether their money is safe in their banks.
Bank depositors have been spared in the euro zone’s other bailouts, though other classes of asset holders and investors have suffered officially sanctioned losses — including owners of Greek government bonds, and bank stockholders in Ireland and Spain. Outside the euro zone, foreign depositors were wiped out in Iceland’s 2008 banking crash.
Jacob Funk Kirkegaard, an analyst at the Peterson Institute for International Economics, noted that Cyprus, the IMF and other international creditors had few options. The country’s banking problems are so deep that the Cypriot government could not afford the loans needed to fix them. And within Cyprus’s banks, deposits are the only pool of money large enough to raise the $7.5 billion international lenders want Cyprus to contribute to a roughly $20 billion total bailout.
Hopefully the government and finance ministers will be able to avert yet another disaster, but how many more will the world be able to dodge?
