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Cyprus bailout: The wrong signal


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Cyprus bailout is defrauding depositors. This a negative signal sent to all European citizens and beyond: savings are no longer safe in the euro zone.

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Cyprus bailout: The wrong signal

  1. 1. Cyprus bailout: The wrong signalCyprus, the eastern Mediterranean island, becomes the fifth country to be rescued: eurozone Finance Ministers agreed on a EUR 10 bn loan; the novelty of the rescue is a tax ondeposits with banks in Cyprus to amount to EUR5.8 billions. Mrs Merkel (and nobodycontradicted her) found that Cyprus is a centre for money laundering (from Russia and theMiddle East) and therefore depositors should be taxed to participate in the bailout; well, ifit is the case (and probably it is), the country should not have been admitted within theeuro zone in the first place and probably the EU, since these accusations have beenrunning 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 waywhere Cyprus would not be able to repay which is right at 200%. Frankly, EUR 10 billionlending does not change the conclusion anyway, at +/- 150% ratio.Bank accounts were frozen and the tax will be immediately levied on Tuesday when banksreopen (subject to a positive vote at the Parliament of Cyprus).The levy is:6.75% tax on deposits below EUR 100,0009.9% tax on deposits above EUR 100,000I would remind the reader that Cyprus banks were meant to go under immediately afterthe haircut was decided on Greek debt (EUR 4.5 billion loss) and nobody foresaw theproblem coming? I do not believe it but since the fiscal situation of Cyprus hasdeteriorated markedly (oh! Yes, I had forgotten that Presidential elections in Cyprus wereheld late February 2013…).Besides the morally disputable action –why punishing the honest citizen who has saved allhis life and in addition may have loans on the other side? – It is a very dangerous actionsending a clear signal to all European citizens and the rest of the world: Europe is nolonger a safe place for depositors; we knew that artificially low rates and risinginflation were in motion to deprive savers, but Saturday’s decision is a leapfrog in thewrong direction. I understand Mrs Merkel who wants to send a tough signal to her publicopinion and Parliament. I am not either convinced by the reason given by the DutchFinance Minister Jeroen Dijsselbloem: “As it is a contribution to the financial stability ofCyprus, it seems just to ask a contribution of all deposit holders”, so what about theGreeks, Portuguese, Irish and Spanish? And what about senior and junior lenders: I would 1
  2. 2. most interested to see whether they will be hit and if yes, in which magnitude (nodetails on this-probably banks mainly financed themselves via deposits; I did not look ataggregated Cypriot bank’s balance sheets)?This is creating a precedent which will hit the confidence in the euro zoneinstitutional environment and safety for depositors. Despites all assurancesyesterday and today, particularly in Spain, that Cypus is a special case (it is ALWAYS aspecial case), residing in a trouble euro zone country, I would be very very worried andwould not wait to get most of my saving in a safe place (i.e. outside the euro zone -thenearest is London). No depositor in the euro zone is safe any longer with his savings: eachcountry could impose such a tax for whatever reason, good or bad (remember Rooseveltstealing gold from Americans in April 1933). This would be politically correct: tax alldeposits above EUR100.000 in countries receiving EU money, and why not in countrieswith disastrous public account (France and Italy). Not the way forward for a sustainablefiscal 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. Anotherwrong 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 Times: Cypriot bank deposits tapped as part of €10bn eurozone bailout 2