Creditors lower boom on Cyprus
Nation could fall if deal not reached by Monday, says Toronto expert
The clock is ticking for Cyprus. European creditors have given Cyprus until Monday to agree to an acceptable bailout plan or they risk losing emergency financing.
If Cyprus fails to come to a consensus, the country risks descending into bankruptcy and faces leaving the eurozone of single currency nations.
Cypriot President Nicos Anastasiades was scrambling on Thursday, trying to come up with an alternative to the idea of imposing a levy or a tax on all bank deposits. Parliamentarians called this idea “bank robbery” and voted overwhelmingly against confiscating deposit funds on Tuesday.
However, the “Troika” of lenders, or, the European Central Bank, the European Union and the International Monetary Fund is insisting Cyprus come up with $7.6 billion of their own money in order to receive $13 billion in loans. The $20 billion is needed to keep the small island’s banking system from collapsing.
The Mediterranean island has devised a plan to restructure its failing banks. The strategy entails splitting the Cyprus Popular Bank into two — one for those holding smaller deposits of less than $131,000 and the other for everything over. Some referred to this as creating a “good” bank for regular savers and a “bad” bank for internationals looking to dodge taxes.
Cypriot central bank Gov. Panicos Demetriades implored parliament Thursday to vote on the restructuring immediately so the bank can stay open.
“Otherwise Cyprus Popular Bank will be led to immediate bankruptcy and cession of operations, with catastrophic consequences for workers, depositors in their entirety, the banking system and the economy of the country,” the statement said.
There are many reasons why the EU has taken a hard-line stand against Cyprus, more so than they have in Greece or Ireland, two countries that have also received bailouts.
The first is it is an election year in Germany and Germans are fed up rescuing sinking European nations.
Secondly, Cyprus is known to have unscrupulous banking practices. It is a tax haven and money-laundering centre with a bloated banking system and deposits of $68 billion. About $31 billion of Russian money is said to be in Cypriot accounts. The Financial Times reports that Cyprus is the No. 1 investor in Russia — as money is filtered back to Moscow.
Third, Cyprus is inextricably linked to the faltering Greek economy. Cyprus lost billions in bonds after an earlier forced writedown in order to rescue Greece.
In desperation, Cyprus has turned to the Kremlin for a bailout but the Russians have, so far, refused. There are reports they will lend if the Cypriots agree to certain demands such as the installation of a Russian military base on the island. Protests flared throughout Cyprus on Thursday as people rushed to take out as much money as they could from ATMs. International watchers agree the situation in Cyprus appears to be getting “worse and worse.” Many different dynamics have come together in the Cyprus crisis, said Steven Kyle, a macroeconomics expert at Cornell University’s Dyson School of Applied Economics and Management. “Nobody else is both exposed to Greek issues and real estate and exposed to the Russian mafia,” Kyle said in an interview. The Cypriots have no real choice but to tax investments over $131,000 in order to secure euro funding. However, once a tax like this is passed, rich investors will pull their money out and never come back, thus destroying the country’s lucrative international banking industry. The Cypriots should accept that this is the inevitable outcome and just tax the big investors anyway in a one-time grab, Kyle said. “If they hit the Russians with a major tax, bigger than the 9.9 per cent that they are talking about, their days as a financial centre are done,” he noted. If a deal is not in place by Monday, the University of Toronto’s John Kirton said the country will collapse and be forced to leave the eurozone. “It is the real destruction of the Cypriot economy. If you have an immobilized banking system with enormous backlogs . . . you can’t pay suppliers. The entire chain shrivels,” said Kirton, the director of the G8 Research Group at U of T. Banks in Cyprus will stay closed until Tuesday to prevent clients from emptying their accounts. With files from Bloomberg