By Liam Murphy
Cypriots woke up on Saturday to the news that deposit holders would bear a significant amount of the burden in a deal aimed at rescuing the banking sector. Those with savings of less than €100,000 will face a ‘tax’ of 6.75 per cent, while those with holdings in excess of this figure will face a hit of up to 9.99 per cent.
There were very few other options for Cyprus to choose, faced with the scale of the problem. However, forcing savers of modest sums to hand over a significant portion of their savings will not only give the EU a bad name, but risk the faith of thousands across Europe, who have so far lived through bailout and austerity programmes with relatively good grace.
The Eurozone countries could never have agreed to pay out the full required bailout (€17 billion). Relative to the size of the small island nation’s GDP, this is an enormous figure, and it would have almost certainly defaulted. On top of that, the sorry state of Cypriot banks’ finances meant that some deposit holders were always going to be targeted.
There were also other forces at play in the background, not least election-year politicking in Germany. The Social Democrats have used the Cypriot bailout to put pressure on Chancellor Angela Merkel. At issue is that the island is a known tax haven for Russian deposit holders, and not a small portion of these holdings are seen as having been generated from illegal activities. That Germans would be ‘bailing-out’ Russian deposit holders is politically toxic, and Merkel could never have signed off on it.
The assertion by President Nicos Anastasiades that there was no option but to hit smaller savers and business owners (those with deposits of under €100,000) is hard to believe. The President himself had alluded to applying a higher ‘tax’ of up to 60 per cent on those holding more than the €100,000 threshold. Christine Lagarde, the head of the IMF, has also advocated the imposition of similarly high rates. The deal as it currently stands is regressive, making the poor suffer while the rich get away relatively lightly.
The Cypriot government will extend Monday’s bank holiday for an extra day so as to ensure there is no run on the banks before it meets tomorrow to debate the deal at 4pm (GMT). Yet, even if parliament ratifies the package, it will have done irreparable damage to recovery efforts in the Eurozone. The principle of deposit insurance has been disregarded and the security of holdings in other troubled Eurozone countries (Spain, Portugal, Greece, Italy) has been cast into doubt. There is no reason to assume that these measures can’t be implemented elsewhere.
In an environment of universal austerity, that large deposit holders are once again getting off the hook is not likely to sit well with European voters. The Cypriot government has until 4pm (GMT) tomorrow, when parliament meets, to negotiate a more progressive solution to its financial troubles.
Mr Anastasiades faces a difficult task to get the rescue package as it currently stands through parliament after four members of Diko, the junior partner in the coalition government, threatened to vote against it. He would do well to heed the advice of Panicos Demetriades, the central bank governor, who has said that small savers should be excluded from the levy to respect the EU guarantee on bank deposits up to €100,000. There is still time.