How would you feel if Stephen Harper announced a plan to seize up to 10 per cent of savings account funds? That’s what President Nicos Anastasiades proposed, and understandably Cypriots reacted with fury and outrage.
The move, which was rejected by parliament yesterday, was supposed to help stave off bankruptcy and allow the country to receive a much needed €10 billion bailout.
Announced last Friday, the move would have seen an imposed tax of 6.75 per cent on all bank deposits for accounts under €100,000 in assets. Accounts that hold more that €100,000 would see a 9.9 per cent tax. This would have raised as much as €6 billion for the cash strapped country. As a result, the IMF and EU would have provided a bailout package of €10 billion to help get the island out of financial trouble.
President Anastasiades says it’s the country’s only clear choice. Without the bailout, Cyprus will be unable to pay its bills beginning as soon as May. But now that parliament has rejected the proposal, where does this leave Cyprus? The banks are closed, people are panicking and the government can’t agree on a course of action. They need a plan b.
Are there other solutions?
The first is Cyprus finds an alternative way to raise the €5.8 billion. This could be “either through a higher haircut on deposits over €100,000 and a lower on smaller deposits…Or they could also sell state assets, such as gas reserves (or banks), possibly to Russian interests, or find other creditors (Russia).”
The second option is Eurozone countries accept that the debt level in Cyprus will rise to 120% of GDP and strike a similar deal to the Greek bailout plan. Annenkov says that depending on the deal and interest rates, it could reduce the amount of money Cyprus needs by €2.5 billion. But the remaining approximately €3 billion would still need to be raised through other means.
So what does this mean for Europe and the citizens of Cyprus?
Cyprus has an unusual situation on its hands. Although the country represents only 0.2 per cent of the Eurozone economy, its banking system holds seven times its economy. The oversized accounts are the result of foreign account holders’ investments, people whose money is thought to come from tax evasion, crime and money laundering – mostly from British and Russian clients.
Here’s the conundrum, though. If Cyprus does not go forward with a deal, it faces bankruptcy and possibly the end of the euro currency, which could have serious economic repercussions. On the other hand, the message they’re sending their citizens is that their money is not safe. This could have serious repercussions for the country, including waning confidence in Europe’s banking system.
The final decision is in the hands of Cyprus’ parliamentarians, many of whom have rejected or abstained from the vote to seize assets. Enraged Cypriots, though, understandably spent the weekend withdrawing their money from bank machines throughout the country.