Bailout? Mare like FAILout! Hahahaha… ha…
by Valerie Heinmets
In the ongoing drama of the eurozone debt crisis, it’s hard to believe that people didn’t see the Cyprus situation coming. As this paper goes to print on March 24, the country sits in a precarious position in the European Union, with President Nicos Anastadiades in the middle of crisis talks in Brussels, widely reported to be centering around whether or not Cyprus will be the first country to leave the EU, an unprecedented move that could have potentially damaging ramifications for the future of the EU as a whole.
To understand the full importance of the situation in Cyprus, it is necessary to understand how it first arrived in such a preposterous financial situation to begin with. Although the small island of just over 1 million people accounts for only 0.2% of the Eurozone’s combined GDP, the country holds a huge amount of investments from off-shore Russian industrialists and oligarchs. To give an accurate image, Cyprus holds off-shore assets worth roughly equal to eight times the country’s GDP. With this money, roughly 25.5 billion euros, and their own country’s assets, the Cypriot government has heavily invested in their very financially unsound neighbor, Greece. These investments have been described as a “black hole in their books,” which for even the financially unsavvy should read as alarming. Despite these poor investment choices, the Cypriots greatest problem remains in their huge amount of foreign investments, sums of money too large for the tiny country to recover for or from.
As these investments were quickly turning sour, Cypriot banks found themselves heavily relying on funding from the European Central Bank. As recently as September of 2012, Laiki, the second largest bank in Cyprus, reported that about one third of their assets were held in the form of loans from the ECB, which is bad, to say the least.
While all this is can certainly be seen to be headed for disaster, the crisis came to a head last weekend after a German-engineered austerity package was put forth that proposed to level a pseudo-tax on personal assets in Cypriot banks, seizing 6.75% on all deposits below 100,000 euros and 9.9% on deposits over 100,000 euros, regardless of insurance. This proposal sparked the panic in Cyprus, as it became increasingly clear just how dire the situation was, and as citizens were obviously enraged at the prospect of their government seizing a sizable portion of their personal bank accounts without a vote. Banks were supposed to remain shut until last Thursday, due to holiday, but have remained closed to help quell the panic and prevent a bank run.
This original EU proposal to tax insured deposits under 100,000 euros has been rejected by the Cypriot parliament, but has returned with fervor during this weekend’s talks. In the latest meetings, there is talk of leaving alone deposits under 100,000 euros, but levying a tax anywhere from 15%-25% on deposits over 100,000 euros. Whether or not this will pass remains to be seen, but doing so would certainly damage any remaining claims Cyprus has on the lucrative business of being a tax haven for foreign funds.
Though there has yet to be a decision reached on these taxes, March 22, the Cypriot parliament did vote to allow the country’s banks to be split into two separate sectors, or basically a good bank and a bad bank. Despite these efforts, the ECB will cut off any further emergency aid on Monday if the country fails to convince its creditors that it can meet the conditions of a bailout.
The bottom line is that Cyprus needs 5.8 billion Euros to keep their banks solvent. The EU, for all intents headed by German Chancellor Angela Merkel (currently in an election year) does not necessarily want to front Cyprus this money mostly because they think the money will wind up in the pockets of Russian mobsters.There is to be no mistaking that relief money, no matter its source, will probably end up in Russia in some amount or another. Meanwhile, the Kremlin, has refused to offer any aid and is uninterested in investigating Cyprus’s claim that they may have untapped oil reserves that Cyprus claims could provide investment opportunities in the future as well as financing for government bonds.
But the EU no longer remains Cyprus’s only answer. Should they not want to accept the strenous terms of a bailout, Cyprus has turned to the troika of financial negotiators European Central Bank, the European Commission and the International Monetary Fund as possible alternatives. Although their future in the Eurozone remains in question, the larger symbolic meaning of the failure of Cyprus remains to be seen.
So far, the panic on the brink of seizing the island has not spread to the rest of the precariously situated financial countries of the EU and a continent wide bank run has not yet ensued. However, if Cyprus does exit the Eurozone, despite Germany’s efforts, there is little outside of the questions of size and influence that can keep other, more influential countries in the Euro-zone who would also object to Germany’s austerity plans, like Greece or even Spain. Despite its relatively small size and influence, it is very possible that the effects of the Mediterranean island will be felt long after a bailout or lack-there-of has been decided.