Photo: Flickr / Samantha Jade Royds
More information is coming to light on the bailout (or “bail-in”) of Cyprus, which involves an instant one-off tax on bank deposits in order to make banks whole.What’s been particularly shocking to some is that the tax will hit the first 100K euros that Cypriots have in their bank accounts (at least according to the initial plan) even though deposits up to that amount are insured.
Apparently the initial proposal (a 10% tax on holdings above 100K, and a 6.5% on holdings below) was the preference of the Cyprus government.
Reuters reports that Germany was fine not hitting the sub-100K depositors (though it would have meant a higher levy on the above-100Kers)
“It was the position of the German government and the International Monetary Fund that we must get a considerable part of the funds that are necessary for restructuring the banks from the banks owners and creditors – that means the investors,» German Finance Minister Wolfgang Schaeuble told public broadcaster ARD in an interview.
“But we would obviously have respected the deposit guarantee for accounts up to 100,000,» he said. «But those who did not want a bail-in were the Cypriot government, also the European Commission and the ECB, they decided on this solution and they now must explain this to the Cypriot people.”
Of course, one of the key dynamics here is that a lot of the money in Cypriot banks comes from rich Russians (Oligarchs, mobsters, etc.) who use Cyprus as an offshore tax haven. This was one reason why there wasn’t much political will to fully bail out the depositors.
As Pawelmorski noted immediately after the deal was announced early Sunday, this one-off tax was something of a concession to the Russians. 10% isn’t so horrible.
And the Russians? The reason small depositors have been hit is that the losses inflicted would be much bigger if a) only large deposits b) only non-EU deposits were haircut. The data on Cyprus deposits is here (MUMs = Monetary Union Members). I would guess the thinking is that 10% is seen as a cost of doing business when it comes to money laundering, but 30% would probably finish Cypriot banking for good. If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that. *
So: senior bondholders and Russians helped at the cost of smaller locals. There’s more logic here than there appears at first glance – the primary aim of this programme is to hold the European banking sector together whilst having a vaguely realistic programme, not placing another huge bill on the core/Germany not ending the viability of Cyprus as an offshore banking sector. My own judgement is that inflicting costs on depositors in principle is an extremely important one, but that not sparing the small depositor is worse than a cruel piece of realpolitik – it is in fact a mistake.
As one analyst we spoke to, who preferred not to be quoted by name put it: “Cut too deep and they price themselves out of the laundry business.”
Anyway, it looks like for political purposes they might have to cut deeper. There are already talks of shifting more of the burden to bigger depositors, and sparing the smaller ones.
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