Cypriot Bailout Strategy

August 2, 2013

On 16th march, the EU and IMF agreed on a €10 billion ($13 billion) deal with Cyprus making it the fifth European country to receive money from the EU and IMF. Part of the bailout agreement demands that all bank customers pay a one-time levy that led to heavy cash withdrawals throughout Cyprus. Under the currently agreed terms, depositors with less than 100,000 euros in Cyprus accounts would have to pay a one-time tax of 6.75%. Those with sums over that threshold would pay 9.9%. Some sources have said that the president may want to lower the former rate to 3%, while raising the levy on the larger depositors to 12.5%. The president of Cyprus, Nicos Anastasiades has insisted that without the bailout, Cyprus could face bankruptcy and a possible exit from the EU. The banks were closed on Monday for a national holiday and are being kept closed to prevent a mass withdrawal. While the government tried its best to prevent mass withdrawals, Cypriots nonetheless lined up at ATMs throughout the country.

The deal still requires the approval of the Cypriot government and the several MPs have indicated that they would like to see a change in the terms of the deal. The vote was initially set to be held on Sunday; however the vote has been postponed to Tuesday. Resistance to the one-time tax has come from both the locals and foreigners equally. Russian President Vladimir Putin called the levy “unfair, unprofessional and dangerous”, while the finance minister said Russia may reconsider the terms of a 2.5bn euro loan to Cyprus. Cyprus has long served as a tax haven to foreigners, especially wealthy Russian families. Russians are believed to hold some 20bn euros of deposits in Cypriot banks. Russian banks have placed another $12bn in Cypriot banks, with corporate deposits at $19bn. Russian corporate and individual investors could lose over $2bn if the tax is approved.

While there is a high chance that the vote never passes and the government will be forced to rethink its bailout strategy, it’s interesting to see such a bold and unique solution proposed in an attempt to raise enough capital for a bailout. It shows that the European Union is still struggling to reduce its debts and improve its economy. Some experts believe that Europe will be unable to improve its economy or employment unless the debt levels are significantly reduced. There will be strong resistance to the move and the Cypriot government will face heavy criticism, however by not aggressively cutting down on debt, the financial system of not only Cyprus but all of Europe is at risk.

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