Published on TheNewFederalist.eu
Cyprus is in pain. A deal struck in Brussels last Saturday between European Finance ministers of the Eurozone says bank deposits in the island up to 100,000 euros should face a levy of 6.7 percent, ripping up the EU protection savers up to that limit, while those above should be taxed for 9.9 percent. As a result since last weekend Cypriots have emptied cash machines and, as national banks have been closed on Monday and Tuesday due to a national holiday, demonstrators have been shutting slogans in the streets such as “Hang the Banksters, Hands off People’s Savings” and “Merkel go home and stay” (as Germany is seen by many as the main responsible for the bank deposits haircuts.
“Europe is for its people and not for Germany”, said one placard waved during a manifestation. Cyprus’s banking sector dwarfs the size of its economy and has been severely hurt by exposure to its neighbour Greece. The levy on bank accounts is part of a 10 billion euro bailout by the European Union broke with previous practice that depositors’ savings were sacrosanct.
According some EU officials, Eurozone ministers urged Cyprus to let smaller savers escape a levy on bank deposits, before a parliamentary vote originally due for today 19 March but eventually postponed that will either secure the island’s financial rescue or threaten default. The finance ministers said they favoured a higher 15.6 percent hit for richer savers, so more modest accounts could be spared.
Particularly Russia proved to be sympathetic with Cyprus. President Vladimir Putin is reported to have said that such a decision would be “unfair, unprofessional and dangerous”. At this regard, Moscow is considering extending an existing 2.5 billion euro loan to help bail the island out and said the fact it had not been consulted about the bailout could come into play.
Other than the social unrest throughout the island, the bank deposits haircut in Cyprus has shredded confidence in the 100,000 euro guarantee on savings offered across the European Union and raised fears of bank runs in other debt-strained countries if savers there worry it could happen to them. Indeed Cyprus’s problems are threatening to disrupt the calm brought to the bloc over the last eight months by the European Central Bank’s promise to protect troubled countries. Of course Brussels has emphasised that the measure is a one-off for a country that accounts for just 0.2 percent of European output. Now the worst fear is that savers in other, larger European countries become nervous and start withdrawing funds, although there was no immediate sign of that on Monday.
Cypriot President Nicos Anastasiades, elected just three weeks ago, said that the tax was an alternative to a disorderly bankruptcy. “It is painful but will eventually stabilise the economy and lead it to recovery”. Nevertheless approval in Cyprus’s 56-member parliament is far from a given as no party has an absolute majority and three parties say outright they will not back the tax.
Some in Europe wonder whether the last Saturday Eurogroup decision has address properly the problem or has settled the Eurozone again in dire straits wasting the Mario Draghi promise of last July that the EC would have done “whatever it takes to save the Euro”.