Cyprus Bailout
Madhav Chaudhari
Cyprus is the latest victim of the euro crisis, in which a combination of highly indebted banks and unsustainable sovereign debts brought several members of the euro zone to the brink of bankruptcy. Cyprus, the small island in the Mediterranean Sea, has the volume of the banks seven times bigger than its GDP. High interest rates and easy access have attracted a lot of foreign capital to Cyprus, and the country has developed a reputation for being a tax haven and even a money-laundering location. Cypriot banks have attracted large amounts of capital from sources seen as dubious by the rest of the euro zone. Around 20 billion of the 68 billion euros deposited in Cypriot banks are thought to be owned by Russians.
But the Cypriot banks high exposure to bad Greek debt meant that when Greece negotiated a debt write-off the so-called “haircut” for its struggling financial institutes in February 2012, Cyprus took a severe blow. Downgraded by the big rating agencies, Cypriot banks were cut off from the international financial markets and only kept alive through infusions from the European Central Bank (ECB) administer of the monetary policy of the 17 European Union member states. But even ECB threatened to withhold these emergency funds unless Cyprus agreed to a deal, so Cyprus budged, accepting to raise around 5.8 billion euros to qualify for a 10 billion euro bailout.
As Germany, Austria, Finland, and the Netherlands made it quite clear that they were not willing to use their taxpayers money to bail out Russian millionaires, a different bailout model had to be found out. So, for the first time in the euro crisis, private account holders in the receiving country are forced to co-finance the bailout effectively having part of their capital confiscated. The impact of this bailout on Cypriot society is enormous. Everyone with an account in Cyprus holding more than 100,000 euros the maximum amount guaranteed under EU law will have around 40 percent of their deposits turned into bank shares. It is impossible to say what these shares will be worth in the future. Account holders with less than 100,000 euros in the bailout were dropped after furious protests and lack of parliamentary support in Nicosia. Cyprus second largest bank, Laiki Bank, is going to be closed. Some 4.2 billion euros worth of accounts that contain over 100,000 euros will be placed in a “bad bank,” thereby isolating them from more stable assets. Cyprus, a legal paradise where state confiscation was unthinkable few years back, sees its money vaporising.
The Cypriot bailout raised a question across Europe – Is Cyprus a Victim of Institutional Discrimination or a model for future bailouts?Some tried to play debate down by saying that Cyprus was a special case, while others argued that from now on account holders and investors should prepare to carry some of the burden in bailout. The latter was sufficient to send shares around the world tumbling. Moreover, it also put the question mark over viability of other countries with a similar economy.
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