Cyprus, the
eastern Mediterranean island, becomes the fifth country to be rescued: euro zone
Finance Ministers agreed on a EUR 10 bn loan; the novelty of the rescue is a tax on deposits with banks in Cyprus to amount
to EUR5.8 billions. Mrs Merkel (and nobody contradicted her) found that Cyprus
is a centre for money laundering (from Russia and the Middle East) and
therefore depositors should be taxed to participate in the bailout; well, if it
is the case (and probably it is), the country should not have been admitted
within the euro zone in the first place and probably the EU, since these
accusations have been running for so many years; by the way, France, the UK,
Luxembourg, The Netherlands, Italy, Spain should also be concerned (money laundered
via banks and/or real estate). Others explained that a EUR 17 billion loan
would overburden the debt/GDP ratio in a way where Cyprus would not be able to repay
which is right at 200%. Frankly, EUR 10 billion lending does not change the
conclusion anyway, at +/- 150% ratio.
Bank accounts were frozen and the tax will be immediately
levied on Tuesday when banks reopen (subject to a positive vote at the
Parliament of Cyprus).
The levy is:
6.75% tax on deposits below EUR 100,000
9.9% tax on deposits above EUR 100,000
I would remind the reader that Cyprus banks were meant to go under
immediately after the haircut was decided on Greek debt (EUR 4.5 billion loss)
and nobody foresaw the problem coming? I do not believe it but since the fiscal
situation of Cyprus
has deteriorated markedly (oh! Yes, I had forgotten that Presidential elections
in Cyprus
were held late February 2013…).
Besides the morally disputable action –why punishing the
honest citizen who has saved all his life and in addition may have loans on the
other side? – It is a very dangerous action sending a clear signal to all
European citizens and the rest of the world: Europe is no longer a safe place for depositors; we knew that
artificially low rates and rising inflation were in motion to deprive savers, but
Saturday’s decision is a leapfrog in the wrong direction. I understand Mrs
Merkel who wants to send a tough signal to her public opinion and Parliament. I
am not either convinced by the reason given by the Dutch Finance Minister Jeroen
Dijsselbloem: “As it is a contribution to the financial stability of Cyprus, it
seems just to ask a contribution of all deposit holders”, so what about the Greeks,
Portuguese, Irish and Spanish? And what about senior and junior lenders: I
would be most interested to see whether they will be hit and if yes, in which
magnitude (no details on this-probably banks mainly financed themselves via
deposits; I did not look at aggregated Cypriot bank’s balance sheets)?
This is creating a
precedent which will hit the confidence in the euro zone institutional
environment and safety for depositors. Despites all assurances yesterday
and today, particularly in Spain, that Cypus is a special case (it is ALWAYS a
special case), residing in a trouble euro zone country, I would be very very
worried and would not wait to get most of my saving in a safe place (i.e.
outside the euro zone -the nearest is London). No depositor in the euro zone is
safe any longer with his savings: each country could impose such a tax for
whatever reason, good or bad (remember Roosevelt
stealing gold from Americans in April 1933). This would be politically correct:
tax all deposits above EUR100.000 in countries receiving EU money, and why not
in countries with disastrous public account (France
and Italy).
Not the way forward for a sustainable fiscal consolidation to create the
bedrock of future prosperity.
In the meantime France
will not abide by the Maastricht
criteria in 2013 (and 2014, I bet), or 8 years over the past 11, without any
sanction, despite repeated assurances. Another wrong signal: the rules do not
apply the same way to every euro zone country.
Source:
Bloomberg: Europe Braces for Fresh Turmoil With Cyprus Deposit Levy
http://www.bloomberg.com/news/2013-03-17/europe-braces-for-renewed-turmoil-as-cyprus-deposit-levy-at-risk.html
Financial Times: Cypriot bank deposits tapped as part of €10bn
eurozone bailout
http://www.ft.com/intl/cms/s/0/33fb34b4-8df8-11e2-9d6b-00144feabdc0.html#axzz2NphVijdj
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