Cyprus bailout plan re-ignites eurozone fears
CORRECTING DATE IN CAPTION Cypriot security guards stand outside the parliament building in Nicosia on March 18, 2013. Cyprus President Nicos Anastasiades was seeking the backing of MPs for an EU bailout deal that slaps a levy on bank savings under harsh terms that have jolted global markets and raised fears of a new eurozone debt crisis. AFP PHOTO/YIANNIS KOURTOGLOU (Photo credit should read Yiannis Kourtoglou/AFP/Getty Images) / AFP
(MoneyWatch) Is Cyprus the fuse that finally burns down the eurozone?
Concerns that a proposed bailout for the small Mediterranean island nation, population 1 million, could re-ignite Europe's government debt crisis appears to be denting financial markets. Stocks in the U.S. opened down, with the Dow Jones industrial average losing more than 50 points in morning trade and the S&P 500 also down slightly after flirting with a new record high on Friday.
Stocks in France, Germany and the U.K. also receded Monday.
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- Cyprus jobless turn to songbird trapping
Under a plan backed by the so-called Troika -- the European Central Bank, European Union and IMF -- Cyprus is proposing to levy a one-time tax on savers as part of a $13 billion bailout. That would put the burden of rescuing the country on bank depositors, even those with insured deposits.
Eurozone officials have said that the tax is essential and that Cyprus's banks will collapse without it. They contend Cypriot banks' low levels of senior unsecured debt leaves few other options that leaning on depositors. The bailout will also include an increase in the corporate tax rate from 10 percent to 12.5 percent and force sales of state assets.
Investors are worried. "The return of fears that one or more countries may actually leave the eurozone altogether could lead to a sustained correction in the prices of riskier assets generally," Julian Jessop, chief global economist for Capital Economics, said in a research note. Monies raised with the new tax would be used to recapitalize the nation's banks and service the country's ballooning debt.
Although the stock sell-off in the U.S. this morning was not severe, it is a reminder that Europe's sovereign debt crisis is only in hibernation. Promises by ECB chief Mario Draghi last year to backstop ailing economies in the region reassured investors that European officials were committed to the eurozone. But the region's underlying problems, especially slow growth, remain.
The announcement on Saturday of the bailout plan caused anxious Cypriots to rush to ATM machines to withdraw funds. With panic in the air, officials modified an earlier plan that would have hit all depositors and are now considering whether to put more of a burden on larger depositors. Under that measure, people with less than 100,000 euros would pay a 3 percent tax, while those with over 500,000 euros would pay 15 percent.
Some 37 percent of Cypriot bank deposits are held by foreign account holders, including Russian companies and individuals that hold an estimated 25 billion in Cyprus banks. That led Russia President Vladimir Putin to blast the proposed levy "unfair, unprofessional and dangerous."
The vote on the new tax proposal was supposed to occur today, but Reuters reported that the Cypriot parliament plans to delay the vote until tomorrow, when banks are closed for a planned holiday. If passed, money would be drawn from accounts overnight.
Could the Cypriot actions spread into a broader eurozone contagion? After all, if the tax can be applied in Cyprus, why not Greece, Portugal, Spain or Italy? European officials underscore that Cyprus is "exceptional" and the measures are "unique," because the banking sector there is eight times the size of the total economy. By comparison, the U.S. banking system is roughly one times the size of the economy.
The bailout amount is also massive compared to other bailouts, representing nearly 70 percent of Cyprus's GDP. The bailout arranged for Ireland after the 2008 financial crisis amounted to 40 percent of the country's economy, while Greece's rescue package was 27 percent.
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Sorry, Obama and his pals have thought of it a long time ago. Thanks to Obamacare, the government has it's finger on the trigger of everyone of our bank accounts. Part of Obamacare gives the government access to all of our banking information. We may the ones who gave the idea to these people. This wouldn't be an Obama field test to see what people would do, it is?
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Good point. The difference is if you try to take money from American bank accounts there will be blood in the streets. Americans may take a lot but eventually will fight back and either win or destroy everything so nobody else can have it either, that's the American way.
If I lived in the U.K., France, Greece, Spain or Portugal and was wealthy I would be pulling all money now and moving to Latin American, the U.S. or Canada.
The Euro will collapse. If a system cannot sustain itself on growth it deserves to die. Collectivism is for the weak and it is evil, it is theft.
To make the story short, Pandora's box is open, and not just in the sense that the Cypriot economy will be destroyed, it already has been, but because the Eurogroup has shown the world that it can come up with some really dum ideas. Perfect if you want to shield the eurozone from a financial crisis and send the right signals to the markets. Apparently the leaders of the Eurozone are not ready to do what is nececcessary to keep the Euro together, and as long as the ECB does not function as a true central bank dictating monetry policy, but it is left at the hands of politicians and the politics of re-election, there is no salvation for the single currency.
The markets have picked up on it and hence their first reaction. Savers will pick up on it. Somehow the swiss franc will look as a so much better currency to keep your savings in the next few days.
That is unless those that have vested interests in holding the signle currency together decide that it is time for a true monetary union.
With interest rates being so dismal, there is very little incentive to have the money in the bank other than for a checking account, and it is safer obviously than having it hid under your mattress! I think there is going to be a lot of money under mattresses in Cyprus in the next few weeks, if they decide against this move. People are not going to trust their hard earned money sitting in a bank anymore.
What a disastrous idea!! What nitwit came up with this ?? I think it will affect banks all over, not just Cyprus. No citizen in Cyprus in their right mind would keep money in the bank now, if the government can just help themselves.
Truely, this sounds like something Obama would come up with. While he is out on the golf course - of course!