Cyprus Banking Crisis Update

The following story (from the New York Times) is a follow up on our previous posting today.  However, before you jump for joy, it could be the beginning of another Eurozone crisis if either of the two following things do not occur.  Should the EU not provide money for the Cypriot banks on Thursday, they might not open which would wreck their economy and cause a currency crisis in Europe. And secondly if they EU does provide money, it might cause other issues with the liquidity of the Euro itself.

The failure of the bank deposit tax is a good thing, however, it would not have happened if the Parliament had not postponed its vote until today. Had it done its work on Friday as had been planned, it would have been fait accompli. Someone will end up paying dearly for this mistake as the European finance ministers will want to punish Cyprus for not doing what had been negotiated.

We would expect that some other deal will be worked out and that for a short window of time Cyprus will get the backing of the EU.  However, it all could blow up and we could be in another Euro crisis.

The lesson to be learned is that decisions must be made slowly and deliberately. Had we done that in 2008, we probably would not be in the mess we are now.

Conservative Tom

Cyprus Rejects Bank Deposit Tax, Scuttling Bailout Deal

Petros Giannakouris/Associated Press

Protesters outside the Cypriot parliament in Nicosia during the vote Tuesday on a bailout package.

By LIZ ALDERMAN

Published: March 19, 2013 23 Comments

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NICOSIA — The Cypriot Parliament on Tuesday overwhelmingly repudiated a €10 billion international bailout package that would have set an extraordinary precedent by taxing ordinary depositors to pay part of the bill.

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Turning Down a Deposit Tax

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Tracking Europe's Debt Crisis

Related

• Cyprus Bailout Incites Turmoil as Blame Flies (March 19, 2013)

• Resistance in Cyprus Grows to Europe’s Bailout Plan (March 19, 2013)

• DealBook Column: A Bank Levy in Cyprus, and Why Not to Worry (March 18, 2013)

• Room for Debate: Should Depositors Save Cyprus's Banks?(March 18, 2013)

• Second Thoughts in Europe as Anxiety Rises in Cyprus (March 19, 2013)

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Petros Karadjias/Associated Press

A Russian Commercial Bank branch in Nicosia on Tuesday. Cypriot banks were expected to be closed through Wednesday.

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The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that would allow the country to receive a financial lifeline and avoid the specter of a devastating default that would reignite the euro crisis.

Lawmakers rejected the plan with 36 voting no and 19 abstaining arguing that it would be unacceptable to take money from account holders. Some in the opposition party even suggested abandoning aEuropean Union bailout altogether and appealing to Russia or China to lend Cyprus the funds it needs to keep the economy and its banks afloat. One member of Parliament who was out of the country did not vote.

Analysts had also raised the possibility of bank runs and a halt in liquidity to Cypriot banks from the European Central Bank if the measure did not pass, meaning banks might not be able to open their doors Thursday, the day that a scheduled bank holiday was supposed to end.

The measure failed despite a revision that would remove some objections by exempting small bank accounts from the levies.

The original terms of the bailout called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000. The levies, a condition imposed by Cyprus’s fellow E.U. members, are designed to raise €5.8 billion of the total €10 billion bailout cost.

Under a new plan put forward by Mr. Anastasiades early Tuesday, depositors with less than €20,000 in the bank would be exempt, but the taxes would remain in place for accounts above that amount.

The rejection drew loud cheers and cries of joy from a crowd of more than 500 protesters who had gathered in front of Parliament since late afternoon, carrying banners denouncing what they said was a confiscation of their private funds. Some wielded unflattering posters of Chancellor Angela Merkel of Germany, a day after a demonstrator breached security at the German Embassy and climbed to the roof, throwing down the German flag.

“Today, Germany is engaging in Nazism again, not with the weapon of force, but with money,” said a pensioner, Dimitris, 67, who would give only his first name.

The central bank governor, Panicos O. Demetriades, had said the revised plan would fall €300 million short of the €5.8 billion demanded by the international lenders. The gap would be considered a breach of the bailout agreement, he said, and “perhaps might not be accepted” by the bailout negotiators.

And even as Mr. Anastasiades submitted the revised plan to Parliament, he had acknowledged that the changes probably would not be enough to secure a majority in the 56-member legislature. “I estimate that the Parliament will turn down the package,” he said on state television as he headed into a series of meetings.

The managing director of the International Monetary Fund, Christine Lagarde, said earlier Tuesday that she was in favor of modifying the agreement to put a lower burden on ordinary depositors. “We are extremely supportive of the Cypriot intentions to introduce more progressive rates,” she said in Frankfurt.

She had urged leaders in Cyprus to quickly approve the plan agreed by European leaders in Brussels last weekend. “Now is the time for the authorities to deliver on what they have commented,” Ms. Lagarde said.

She complained that critics have not recognized the value of the agreement, in that it would force banks in Cyprus to restructure and become healthier.

In Brussels, Simon O’Connor, a spokesman for Olli Rehn, the E.U. commissioner for economic and monetary affairs, said Tuesday that finance ministers from countries using the euro had agreed the previous night in a teleconference that Cyprus could adjust the way the levy would operate.

But Mr. O’Connor said the E.U. authorities were still waiting to see whether the adjustments being discussed in Cyprus delivered “the same financial effect” as the agreement between Cyprus and international lenders in the early hours of Saturday.

“On the parameters of this levy, we will not comment as long as that’s a process that’s still under way,” Mr. O’Connor said.

On the prospect that expatriates in Cyprus may not have access to their bank accounts any time soon, the British Ministry of Defense said Tuesday that it had sent a Royal Air Force plane to Nicosia with €1 million on board to offer loans to British military personnel there.

The money, it said, was meant to “provide military personnel and their families with emergency loans in the event that cash machines and debit cards stop working completely.”

The ministry also said that it offered to pay the salaries of employees in Cyprus into British bank accounts. “We’re determined to do everything we can to minimize the impact of the Cyprus banking crisis on our people,” the ministry said in a statement.

James Kanter contributed reporting from Brussels, Jack Ewing contributed from Frankfurt and Julia Werdigier contributed from London.