Cyprus is on tap for a $13 billion bailout from the European Union, but the financial lifeline comes with some pretty onerous strings attached. For the first time in the rolling European financial crisis, ordinary bank depositors are being asked to pony up, with a combined $7.5 billion in one-time taxes on their savings accounts. (Everyone would see their savings hit with a 6.75 percent tax, and larger deposits would be taxed at nearly 10 percent.)
President Nicos Anastasiades, inaugurated in late February, is urging Cypriot lawmakers to approve the bailout package, saying Sunday that failure to do so could lead to "a complete collapse of the banking sector," and could even force the divided island nation from the eurozone. Early Monday, parliament balked for a second time, putting off any vote until Tuesday afternoon, although that could easily drag on until Friday. In the meantime, Cyprus extended an order closing all banks in the country until at least Friday, to prevent a bank run.
Cypriots, it seems, are not the only ones unhappy with the bailout's terms. Stocks across Europe and much of the rest of the world were sharply lower Monday, as investors digested the possibility of Cyprus going under — and similar unpopular bank-depositor taxes for other struggling European nations, like Spain and Italy.
For this to work, everybody — especially Europeans with bank accounts and investors in European sovereign bonds — will have to be "hypnotized into thinking that Cyprus really is unique," says Kevin Drum at Mother Jones.
Cyprus was basically an offshore banking haven for Russian plutocrats, so it grew to gargantuan proportions compared to the size of the country. If it had failed, the entire country would have imploded. That's bad. On the other hand, no one really felt like spending a trainload of EU taxpayer money to prop up a bunch of Russian oligarchs. That would be bad too. So the EU's politicos wanted to make the oligarchs pay a price for being rescued. [Mother Jones]
Still, there are problems with this gambit, says Megan McArdle at The Daily Beast. First, "Europe seems to be chock full of unique, one time problems with its banking system," so it wouldn't be unreasonable for leery investors to "decide that they'd rather not stick around to see what one-of-a-kind, custom-crafted solution the European ministers come up with next." Then there's the "extremely foolish" decision to ding deposits below 100,000 euros — which are supposed to be insured under Cyprus law (think: FDIC).
If violating the deposit guarantees was necessary to implement your "tax the Russians to pay for the bank bailout plan", that should have been a sign that the plan was a bad idea. Deposit insurance is the one way we know to stop a bank run. Oh, the government can say that this was a one-time thing, but once you've broken your promise once, what's to stop you from doing it again? It's bad enough to slam middle-class savers in order to put a smaller levy on Russian oligarchs, but it's insane to do so when you're actually making it less likely that your bank bail-in will succeed. [Daily Beast]
Indeed, says The Wall Street Journal in an editorial, this deal is "an instant classic of euro-crisis dysfunction."
The cleaner solution would have been a 20 percent haircut on deposits over 100,000 euros, with writedowns on all bank debt. This would have respected creditor hierarchy and, by not trampling on deposit insurance, honored the rule of law. Uncertainties still cloud the deal... But one thing is clear: In the way it was cooked up and the way it apportions the pain, the Cyprus bailout is a step backward for legal predictability in the never-ending euro-zone crisis. [Wall Street Journal]
President Anastasiades will come in for a lot of criticism over this deal — he swore in his inauguration that "absolutely no reference to a haircut on public debt or deposits will be tolerated," after all, says the Cyprus Mail in an editorial. But "it is obvious from the statements made that Anastasiades was blackmailed into accepting" the deal, and things would be worse for Cypriot depositors if the banks collapsed, which they will surely do without a bailout.
Germany and the leaders of the Eurogroup opted for this lunacy, calculating that Cyprus is too small and inconsequential for the haircut on its bank deposits to cause contagion in the eurozone.... Under the circumstances the president opted for the lesser of two evils, even though we doubt there would be many people who would give him credit for that. In effect, the EU offered a 'rescue package' that is designed to destroy rather than rescue what is left of the Cyprus economy. [Cyprus Post]