Cyprus bailout - Eurozone tests a new approach

[Franknburger]

In an unprecedented manner, Eurozone ministers have tied their recent 10 bn € bailout of Cyprus' struggling banking sector to introduction of a one-time withholding  tax of up to 9.9% on deposits, and corporate tax increase from 10% to 12.5%. Initial reports and comments have focused on local reaction to this move, and possible consequences for the struggling banking sectors in other Mediterranean countries.

There are, however, two other remarkable aspects which so far have hardly been discussed:

Firstly, this is a significant policy shift on behalf of major Eurozone members (Germany, Netherlands), and the IMF. So far, the focus of bailout conditions had been on the expenditure side of budgets, i.e. reducing transfer payments (unemployment, pensions etc.) and public sector spending. Such austerity policies have become widely criticised, as they have triggered demand slumps and an economic downturn spiral in the affected countries, notably  Greece and Portugal. This time, the focus is clearly on the revenue side, and especially revenues from capital and entrepreneurship, while labour income and social transfers have so far been left untouched.

Secondly, the move pulls non-Eurozone members that have so far courtly abstained from getting visibly involved into the boat. This concerns first of all Russia, since it is estimated that more than half of the deposits in Cypriot banks are held by Russian companies and individuals. As Cyprus has for a long time been connected to money-laundering, the Russian government might be anything but unhappy about the Eurozone decision, but their official statement is yet to be awaited. In addition, the UK is suddenly finding itself being asked to contribute, as the withholding tax on deposits is affecting British soldiers and pensioners on the island.

One thing is for certain: The Cyprus bail-out has fundamentally changed the rules of the game, and will have far-reaching consequences beyond Cyprus and the Eurozone.

[DC Al Fine]

Taking aside the morality of going into people's savings accounts and taking out the money, how do they expect that this won't cause more problems than it solves.?

If I'm Greek, Spanish etc, and I have any savings at all, I'm going to be withdrawing them, and so will everyone else. Expect other countries' banks will have issues as anyone with money tries to get it out of the bank before they get slapped with a deposit tax.

What a horrid idea this proposal is. This is outright theft.

[Paleobrazilian]

Brazil tried this some 20 years ago. As you know, this failed badly.

Leave the Euro while you can, Cyprus.

[King]

Europe is still making the same mistake.  A loan where the borrower has to pay back immediately through taxes or cuts is no loan at all.

[bgwah]

That sounds awful.

[King]

If I'm Greek, Spanish etc, and I have any savings at all, I'm going to be withdrawing them, and so will everyone else. Expect other countries' banks will have issues as anyone with money tries to get it out of the bank before they get slapped with a deposit tax.

While this is terrible for the working people of Cyprus, I hope it does spark this fear.  In the long term, tax haven banking states need to go.  They create gross inefficiency and always fail in the end.

The problem here in Cyprus would not happen if banking weren't their top industry and therefore the only place they could go for money.

[Insula Dei]

Horribly bungled execution of a terrible idea sums it about up.

[Filuwaúrdjan]

what is this i dont even

[DINGO Joe]

So, what happens to depositors money if they let the banks fail?  And why should anyone bail out a bank haven?

[King]

Parliament has already overturned the decision following outcry.

[Antonio the Sixth]

Fuck you, Merkel.

[Franknburger]

Some additional figures have appeared in the press here today. Cyprus original request was for 17.5 bn Euro support to keep banks from collapsing. The country's GDP is 18 bn Euro. In other words - they asked the other Eurozone members for one year's GDP, with a national debt already standing at 99% of GDP. All against the background of failing to comply with the EU's regulation on financial transparency, and obvious unwillingness to increase capital gains tax substantially above the current level of 10%.
The Cyprus government's argument, as was reported,, was that due to the recently inaugurated European Guarantee Fund for saving accounts, Eurozone members would anyway have to pick up the losses, be it by lending money to Cyprus (which obviously never can be paid back), or by compensating saving account holders for their losses in case of bank collapses.

The deal that was finally struck included 10 bn Eurozone money, with the remaining 7.5 bn to be raised by the Cypriot government from domestic sources or other creditors. The IMF, after looking at the figures, apparently declined participation, while Russia might reschedule existing loans and eventually put in some fresh money. In any case, Cyprus needs to come up with some 5 bn Euro of own money, which is more than 25% of GDP. No way, even with strictest austerity and substantial tax increases, they can even get close to that sum other than by taxing depositors.

It seems the Eurozone members have done some calculation in the meantime, The default guarantee is limited to 100,000 € per deposit holder. More than half of the deposits are held by Russian and Ukrainian financial investors. It is also suspected that quite some Greek money has landed in  Cypriot banks, and many depositors might not be too keen to declare the whereabouts to the Eurozone Guarantee Fund, in which Greece is a member. All in all, a collapse of Cypriot banks would - at least on the short run - probably cost Eurozone members far less than the envisaged 10 bn Euro (sunk) support.

Cypriot politicians are playing a very dangerous game in order to avoid telling their citizens that the country is already bankrupt.

[Franknburger]

Fuck you, Merkel.

Asides from the fact that Merkel was not involved (the Dutch Finance minister lead the negotiations, Germany was represented by Finance Minister Schäuble), you seem to forget that France and Italy together have more weight in the Eurozone funds than Germany. And, if anybody can control Mrs. Lagardere from the IMF, it should be rather the French than the German Government.
If the Cyprus risk had been shared at the usual quotas, out of the 10 bn €, 2.9 bn € would have fallen on Germany, 2.2 bn on France,  1.9 bn on Italy, and 1.3 bn on Spain.

[Antonio the Sixth]

Fuck you, Merkel.

Asides from the fact that Merkel was not involved (the Dutch Finance minister lead the negotiations, Germany was represented by Finance Minister Schäuble), you seem to forget that France and Italy together have more weight in the Eurozone funds than Germany. And, if anybody can control Mrs. Lagardere from the IMF, it should be rather the French than the German Government.
If the Cyprus risk had been shared at the usual quotas, out of the 10 bn €, 2.9 bn € would have fallen on Germany, 2.2 bn on France,  1.9 bn on Italy, and 1.3 bn on Spain.

Merkel is obviously a nice umbrella to cover the retarded neoliberal assholes who govern Europe and singlehandedly caused all this mess... but yeah, German politicians on the whole deserve a huge chunk of the blame.

[Link]

Taking aside the morality of going into people's savings accounts and taking out the money...

How times have changed.  It's awesome watching Western right wingers say it's morally wrong to take the KGB's money.

You must be logged in to read this quote.

http://www.dailymail.co.uk/debate/article-2295454/Cyprus-banking-crisis-Kebabbed-Banko-Kleftiko.html?ITO=1490&ns_mchannel=rss&ns_campaign=1490

Some local Cypriots are getting dinged in this ill conceived plan but the bulk of the money belongs to shady Russians.  Is it morally wrong to tax criminals?  I don't think so.  We confiscate stuff from them without a trial all the time in the US.

I heard about this crisis in bits an pieces for days and was confused.  I didn't take the time to sit down and really read about it.  But finally when I heard a blurb on the radio that Putin was saying the deal was unfair I was like, why does that guy suddenly care?  At that point I was forced to stop being lazy and actual do some reading.  Apparently some people in Cyprus got in bed with some rather shady characters.  Most of the wealth getting dinged here does not belong to hard working morally upstanding citizens who earned that money through their own legal efforts.  That doesn't mean the plan isn't stupid.  But morally wrong?  No.  I don't think so.  Not for most of the big accounts.

[○∙◄☻¥tπ[╪AV┼cVê└]

Well, that bad idea got rejected pretty fast. I wonder if any banks failed because of the mass withdraws.

[True Federalist (진정한 연방 주의자)]

Well, that bad idea got rejected pretty fast. I wonder if any banks failed because of the mass withdraws.

Not yet.  As soon as word leaked they were thinking of doing this, Cypriot banks were put on a bank holiday with access to funds frozen.

[Franknburger]

Fuck you, Merkel.

Asides from the fact that Merkel was not involved (the Dutch Finance minister lead the negotiations, Germany was represented by Finance Minister Schäuble), you seem to forget that France and Italy together have more weight in the Eurozone funds than Germany. And, if anybody can control Mrs. Lagardere from the IMF, it should be rather the French than the German Government.
If the Cyprus risk had been shared at the usual quotas, out of the 10 bn €, 2.9 bn € would have fallen on Germany, 2.2 bn on France,  1.9 bn on Italy, and 1.3 bn on Spain.

Merkel is obviously a nice umbrella to cover the retarded neoliberal assholes who govern Europe and singlehandedly caused all this mess... but yeah, German politicians on the whole deserve a huge chunk of the blame.

You are missing the point here:
1) Cyprus did not get the typical neoliberal  "VAT increase & pension cut & reduced public spending" prescription, as even neoliberals have realised that such policies cannot be effective there. Whether that conclusion will in future also be applied to other countries (e.g. Greece) remains to be seen.  
In any case, it is inappropriate to see this new confiscatory approach as expression of neoliberalism.

2.) Your diagnosis ("singlehandedly caused all this mess") is oversimplified as well. The 'mess' evolved in a combination of various factors: Insufficient political / institutional governance of the Eurozone, unwillingness to adapt national economic policies to the new reality of having a common currency, and country-specific structural problems (housing bubble in Ireland, public sector inefficiency in Greece, etc.). As thus, all Eurozone countries have to take some of the blame, and are facing the joint challenge to find ways out and prevent similar problems in future.

In the case of Cyprus, however, I tend to put most of the blame on their national policies. They have over the last 20 years gained a reputation as save haven for Russian mafia money, and done little against that. Implementation of EU anti-money laundering legislation has been lacklustre as best.

You must be logged in to read this quote.

Source: Spiegel online
When I worked for another international organisation some ten years ago, I myself saw several reports that uncovered the relation of fraudulent operations in Russia, which cost European and American taxpayers tens of millions of Dollars, to Cyprus-based financial holdings. Add to this the fact that, in spite of quickly increasing public debt, Cyprus has maintained its corporate tax rate at 10%,  below the harmonised tax rate corridor agreed by all EU member states. If it wasn't an EU member, but somewhere off the American coast, Cyprus would long have been blacklisted for business by all of the EU.

Cyprus is a special case that deserves special treatment. By implicitly associating it with other recipients of Eurozone support such as Ireland, Portugal, Spain and even Greece, you are greatly unjust to the latter.

[○∙◄☻¥tπ[╪AV┼cVê└]

Well, that bad idea got rejected pretty fast. I wonder if any banks failed because of the mass withdraws.

Not yet.  As soon as word leaked they were thinking of doing this, Cypriot banks were put on a bank holiday with access to funds frozen.

So some people are stuck scrounging for food until their ATM works again all because of a leaked policy that was shot down?

[Antonio the Sixth]

Fuck you, Merkel.

Asides from the fact that Merkel was not involved (the Dutch Finance minister lead the negotiations, Germany was represented by Finance Minister Schäuble), you seem to forget that France and Italy together have more weight in the Eurozone funds than Germany. And, if anybody can control Mrs. Lagardere from the IMF, it should be rather the French than the German Government.
If the Cyprus risk had been shared at the usual quotas, out of the 10 bn €, 2.9 bn € would have fallen on Germany, 2.2 bn on France,  1.9 bn on Italy, and 1.3 bn on Spain.

Merkel is obviously a nice umbrella to cover the retarded neoliberal assholes who govern Europe and singlehandedly caused all this mess... but yeah, German politicians on the whole deserve a huge chunk of the blame.

You are missing the point here:
1) Cyprus did not get the typical neoliberal  "VAT increase & pension cut & reduced public spending" prescription, as even neoliberals have realised that such policies cannot be effective there. Whether that conclusion will in future also be applied to other countries (e.g. Greece) remains to be seen.  
In any case, it is inappropriate to see this new confiscatory approach as expression of neoliberalism.

2.) Your diagnosis ("singlehandedly caused all this mess") is oversimplified as well. The 'mess' evolved in a combination of various factors: Insufficient political / institutional governance of the Eurozone, unwillingness to adapt national economic policies to the new reality of having a common currency, and country-specific structural problems (housing bubble in Ireland, public sector inefficiency in Greece, etc.). As thus, all Eurozone countries have to take some of the blame, and are facing the joint challenge to find ways out and prevent similar problems in future.

I know I'm oversimplifying. This is a result of overwhelming anger at how the whole "debt crisis" has been handled from its very outset.

[Franknburger]

I know I'm oversimplifying. This is a result of overwhelming anger at how the whole "debt crisis" has been handled from its very outset.

The anger is understandable. However, anger is not always the best way to identify ways forward.

And if you talk about "the outset", you have to go back to Mitterrand and Kohl, or even to Greece's admission to the EC for purely political reasons, without a workable concept on how to deal with its peripheral location and structural weaknesses. The discussion we are having now (cash transfer from the centre, coupled with credible and effective reform in the periphery) should have been held 30-40 years ago (it was, in effect, but did not have political consequences).
Instead, Germany (plus the Netherlands and a few other countries) assumed they can forever go on with exporting their products to the periphery, without having to care for how these exports can be financed. And some peripheral states / regions thought they can continue paternalist domestic policies now that they have a big brother to pay the bill.  Add to this France and the UK, both quite often denying constructive leadership and instead focusing on maintaining agricultural subsidies and their payment discount, respectively, and you start to wonder why this mess did not become apparent much earlier.

[Antonio the Sixth]

I'm certainly not denying that the system backing the common currency (or rather, the lack thereof) has been extremely poorly constructed, and the responsibility for this obviously lies in those who designed the initial system. However, the Euro crisis, back in 2009-2010, gave us an opportunity to fix what was broken, and this opportunity was wasted for political expediency. This is the most frustrating thing in all this.

[DINGO Joe]

It looks like a deal has been reached, the first $100,000 in Euros are exempt, deposits above that amount will be taxed around 20%.