EU bails out banksters by grabbing small depositor money in Cyprus
The euro zone struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risks of a wider run on savings.
The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region's debt crisis.
In a radical departure from previous aid packages - and one that gave rise to incredulity and anger across the country - euro zone finance ministers forced Cyprus' savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.
Almost half of its depositors are believed to be non-resident Russians, but most of those queuing on Saturday at automatic teller machines to pull out cash appeared to be Cypriots.
Just what the Eurozone needs! A bank run!
If you want expert commentary see Ed Harrison. Here's a round-up of some quotes that caught my eye.
So: senior bondholders and Russians helped at the cost of smaller locals. There’s more logic here than there appears at first glance – the primary aim of this programme is to hold the European banking sector together whilst having a vaguely realistic programme, not placing another huge bill on the core/Germany not ending the viability of Cyprus as an offshore banking sector. My own judgement is that inflicting costs on depositors in principle is an extremely important one, but that not sparing the small depositor is worse than a cruel piece of realpolitik – it is in fact a mistake.
A key angle here is the Russian angle.You may remember that along the way during the crisis, Cyprus has sought aid from Russia, which is unusual. Well the reason for that is that (Island of) Cyprus is a place where Russians are believed to do a lot of money laundering, which involves marking cash in Cypriot banks.
What’s stunning about today’s bailout is that depositors with over 100K EUR in a Cypriot bank will see a 10% tax instantly before banks reopen on Tuesday.
Overnight, the Eurozone and Cyprus took the unprecedented step of announcing a tax on depositors in order to raise the necessary funds to recapitalise Cypriot banks and reduce the cost of a bailout. Have no doubt, this is a very radical measure and one that, admittedly, we did not believe would happen for just that reason.
Here are the details of the plan:
One-time 9.9% levy on deposits over €100,000
6.75% levy on deposits below that level
Cypriots hit by the deposit levy will be given bank shares of equal value
Increase in corporate tax rate to 12.5% (from 10%)
€1.4bn in privatisations
€10bn bailout loan (likely including the IMF)
Cypriot debt to GDP to be at 100% in 2020
The seizure of deposits will happen over the weekend, while there is conveniently a bank holiday on Monday in Cyprus. Depositors will be unable to move funds, even electronically, before the move is complete on Tuesday (more on this further down). As we said, this is clearly an unprecedented move and the fallout will be interesting, below we list the key points to watch as this progresses.
Just when you think nothing could get any weirder.