Cyprus bailout: Who messed up?

 
Angry Cypriots protesting in Nicosia, 18 Mar 13 Cypriots feel their country is facing a diktat from German and EU officials

Almost nobody now believes the Cypriot bailout deal negotiated in the early hours of Saturday morning was smart.

As the economist Paul Krugman put it, it was as if Europeans were holding up a sign which read "time to stage a run on your bank". In Europe's corridors of power there is the sound and sight of officials pointing fingers and rowing back from previous positions held.

Here's the reality: Cyprus's banks will remain closed at least until Thursday while they try and unravel this. The Cypriot parliament may delay again today voting on a bailout deal that has brought protesters onto the streets. Bank shares in Europe have been under pressure. The markets are unnerved. Fear has returned to the eurozone. The EU's reputation has been damaged.

Not a good day's work.

So what's happening? After a conference call on Monday, Europe's finance ministers said that small savers, who were going to be taxed at 6.5%, should be protected.

A new proposal from the finance ministry has surfaced today. The aim is to better protect the small savers. Under the plan those with savings less than 20,000 euros would pay nothing. Those with deposits between 20,000 and 100,000 would pay a one-off levy of 6.75%. Savings above 100,000 would face a 9.9% tax.

The proposal leaves in doubt whether it could raise the nearly 6bn euros that was a central part of the bailout deal.

And in a further indication of just how complicated this could become, the Cypriot Central Bank Governor Panicos Demetriades said he expected that 10% of deposits would be withdrawn when banks finally open.

The Cypriot government appears to have decided against raising the levy on those with deposits of more than 100,000 euros to over 15%.

Here's the rub: The government fears this would effectively destroy its financial sector. Those wealthy Russians, who are the largest foreign investors, are likely to pull their funds out of the island if the one-off tax is too high. The Russians are angry and the Cypriot finance minister is heading to Moscow to explain.

On verge of bankruptcy

The Cypriots argue that the bailout would end up undermining a key sector of the economy. The suspicion in Nicosia is that it is precisely what countries like Germany want. They don't like tax havens for the wealthy.

Levy basics

  • Depositors with 20,000 - 100,000 euros deposited must pay 6.75%
  • Those with more than 100,000 in their accounts must pay 9.9%
  • Depositors will be compensated with the equivalent amount in shares in their banks
  • The levy is a one-off measure
  • Eurozone wants Cyprus to get 5.8bn euros from deposits, in exchange for a 10bn-euro EU/IMF loan
  • Total of about 68bn euros on deposit in Cypriot banks, foreigners hold about 40% - most of them Russians

So how did Europe get itself into this tangle? As always Germany is the starting point. For Chancellor Angela Merkel there was a moral element to this. "Anyone having their money in Cypriot banks," she said, "must contribute to the Cypriot bailout". In other words it can't just be left to the taxpayers of other countries.

The Cypriots say that the German Finance Minister Wolfgang Schaeuble was a strong proponent of taxing savers. At the talks the IMF also played tough. It insisted that Cypriot debt had to be sustainable and that meant reducing the size of the debt. So depositors were lined up to take a "haircut" - a slice from their savings.

The Cypriots tried to hold out but they were faced with a veiled threat. The European Central Bank (ECB) might stop providing funds to Cyprus's two major banks. Without support, the banks would collapse and bankruptcy would follow.

When the protests started, Mr Schaeuble tried to distance himself from what had been decided in Brussels. He told German TV that it was the European Commission and the ECB that had "decided on this solution and must explain that to the Cypriot people". The Cypriots say it was the Germans who had pushed hard for the levy on depositors. Berlin says "yes" but not on small depositors.

The arguments, no doubt, will continue. The legacy of this will be harder to forget.

Domino effect?

A suspicion will linger in places like Italy and Spain that, although European officials insist this was a one-off deal, depositors elsewhere might face a tax on their accounts.

There will also be the suspicion that the finance ministers were willing to undermine the Europe-wide deposit insurance scheme with a sleight of hand.

The episode also underlines again how much resentment is building in southern Europe towards the north and Germany in particular. Many of the protesters in Nicosia are openly antagonistic towards Angela Merkel and Berlin.

There will be a question whether - as with previous bailouts - the measures adopted will damage the very economy they are intended to save.

Cyprus reminds Europe how dangerous the eurozone crisis remains.

 
Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

Scotland's vote weighs on Europe

A Scottish Yes vote would pose a big challenge to EU membership rules, Europe editor Gavin Hewitt writes.

Read full article

More on This Story

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    0

    Comment number 337.

    Cyprus bank crisis just proved the old saying that there's no honor among thieves.Cypriots who enjoy a standard of living based on an economy that circumvents financial laws and a European Union that feels free to dictate to anyone and everyone and steal what they need if they don't have it legally.It's been that way from the beginning.No good ever came from union created only to confront others

  • rate this
    0

    Comment number 336.

    Having spent hundreds of billions already to bail out the PIIGS will the EU allow Cyprus to go under for just 17 Billion? Sounds crazy to me but hey look who's in charge. Interesting there's been no demand from anyone to investigate Cyprus banking practices to see if they're doing anything illegal the way other banks like those in the UK did. They don't want to know, don't care about that. Crooks!

  • rate this
    0

    Comment number 335.

    334 Not only has the German Parliament drawing a red line in the sand but the EU and ECB once said it would never seize depositor assets. Yet here they are being proven liars once again. All trust in them is gone. This year Cyprus, next Spain, France, Greece again, and who knows who else. You can't count on anything they say.People with money will find places that havent' lied to them yet.

  • rate this
    0

    Comment number 334.

    332.sieuarlu
    Well EU is certainly strong enough to deal with Cyprus.
    Until recently it was not even in the news
    So this little storm will be over soon

  • rate this
    0

    Comment number 333.

    The EU has lost all credibility. They said this would be a one time tax. They also said there would only be one bailout of Greece necessary. Who would believe one word they say. Europhiles and Euro-socialists will do anything they can no matter what to save the European project.It won't work. It's broken beyond fixing. There's no planning for the aftermath, they're in denial.

 

Comments 5 of 337

 

Features & Analysis

Elsewhere on the BBC

  • GeoguessrWhere in the world...?

    Think you are a geography expert? Test your knowledge with BBC Travel’s interactive game

Programmes

  • StudentsClick Watch

    Could a new social network help tailor lessons to students’ needs and spot when they fall behind?

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.