Government and politicians in Cyprus are trying to earn valuable time for re-assessing the situation and properly reacting to Euro Zone’s (Germany’s) ultimatum of imposing a bank tax or follow a disastrous default by allowing the island’s banking sector to collapse:
Cypriot ministers were trying to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will secure the island’s financial rescue or could lead to its default, with reverberations across the euro zone. The weekend announcement that Cyprus would impose a tax on bank accounts as part of a 10 billion euro ($13 billion) bailout by the European Union broke with previous practice that depositors’ savings were sacrosanct. The euro and stock markets fell on concern the euro zone crisis was returning. Before the vote, which is too close to call, the government was working to soften the blow to smaller savers by tilting more of the tax towards those with deposits greater than 100,000 euros ($130,700. Many of these depositors Russians and the planned levy has already elicited an angry reaction from President Vladimir Putin. The government says Cyprus has no choice but to accept the bailout with the tax on deposits, or go bankrupt. A Cypriot source told Reuters the introduction of a tax-free threshold for smaller bank deposits – maybe up to 20,000 euros – was under discussion but not yet agreed.
More importantly, banks are to remain closed in Cyprus tomorrow as they can serve their cusomers restricted banking needs by just putting money to ATMs:
The parliamentary speaker said debate on the bank levy would be delayed until 12:00 p.m. EDT on Tuesday, suggesting banks, shut on Monday for a bank holiday, will remain closed on Tuesday. The euro zone has indicated that changes would be acceptable as long as the return of around six billion euros is maintained. If the Cypriot parliament votes the deal down, the euro zone would face a risk of being dragged back into crisis. ”It is up to the government alone to decide if it wants to change the structure of the … contribution (from) the banking sector,” European Central Bank policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, told reporters on the sidelines of a Berlin conference. ”The important thing is that the financial contribution of 5.8 billion euros remains,” he said.
On the other hand, it is becoming clear that the Euro Zone decision making centers look at Russia by imposing the bank tax in Cyprus, in an effort to eliminate the island’s investing and banking influence to the South-Eastern Mediterranean region and the Arabic world:
Russia’s president Vladimir Putin criticised the proposed Cyprus levy on banking deposits “unfair, unprofessional and dangerous,” his spokesman Dmitry Peskovquoted the president as saying. Mr Peskov said Mr Putin held a special meeting today to discuss developments in the debt-stricken Cyprus. “Assessing the possible decision of imposing additional tax by Cyprus on deposits Mr Putin said that this decision, if taken, would be unfair, unprofessional and dangerous,” Mr Peskov said. Russian banks had about €9.2 billion ($12 billion) placed with Cypriot banks and corporate deposits amounted to €14.6 billion ($19 billion) at the end of 2012, according to Moody’s's rating agency. The announcement at the weekend that tiny Cyprus would impose a tax on bank accounts as part of a €10 billion ($13 billion) bailout broke with previous Eu ropean practice that depositors’ savings were sacrosanct.
The developments in Cyprus has already caused a global economic impact on equity futures, gold and oil prices:
U.S. equity futures were sharply lower in early premarket trade Monday after EU leaders agreed to help fund a bailout of Cyprus. The deal however, penalizes savers in the country by taxing their bank deposits. The EU leaders want to impose a percentage levy on the deposits in exchange for the bailout.
Gold, a traditional safe-haven asset in times of economic uncertainty, saw its biggest rise in a month, gaining more than 1pc to $1,604 an ounce. Shares, by contrast, fell on Monday morning as the markets reacted to news over the weekend that Cyprus would confiscate up to 10pc of its citizens’ bank balances as part of an EU bail-out. The FTSE 100 index fell by more than 1.5pc. Angelos Damaskos, who runs the Junior Gold fund, said: “The decision by Cyprus to impose a charge on all bank deposits is a fresh reminder of the huge risks in the eurozone periphery. It could undermine confidence in the banking system and cause further instability that will be difficult to contain.
Brent crude dropped more than $1 to below $109 a barrel on Monday in its steepest fall in nearly three weeks as the dollar strengthened after an unusual bail-out proposal for Cyprus threatened to trigger fresh turmoil in the eurozone. News that Cyprus would have to tax depositors as part of a bail-out plan sparked fear of a run on some banks in the region, driving down the euro and other riskier assets such as Asian shares and base metals. A string of positive numbers from the world’s top oil consumer the US and persistent concern about supply disruption helped stem further losses in oil.
But the bail-out weekends are back:
BAIL-OUT weekends are back, but the latest rescue, of the tiny island of Cyprus, has crossed a rubicon in hitting bank deposits. At Schumpeter, a colleague runs down the details:
“The euro zone’s bail-out of Cyprus, which was sealed in the early hours of Saturday, did get the bill for creditor countries down from €17 billion to €10 billion, as had been rumoured. But the way it did so was somewhat unexpected.
Almost €6 billion of the savings for taxpayers in euro-zone countries came from losses imposed on depositors in Cyprus’s outsize banks. A one-off 9.9% levy will be imposed on all deposits over the insurance threshold of €100,000 before banks reopen after a bank holiday on Monday. That idea had been in the air for a while, not least because a lot of those uninsured deposits came from outside Cyprus, and from Russia in particular. The politics of saving wealthy Russians with money loaned by thrifty Germans were always going to be tricky.
What had not been anticipated was a 6.75% loss for savers with deposits in Cypriot banks below the insurance ceiling. Cypriots woke up this morning to find bank branches closed to them. By the time they will be able to get at their money, it will be too late. The offer of equity in banks to replace the value of their savings is meant to be a balm but it’s not a choice they would have made. Why this decision was taken is not yet clear. The most plausible explanation is that the Cypriot government itself preferred to spread the pain rather than wipe out non-resident depositors and jeopardise its long-term prospects as an offshore financial centre for Russian and other money.”
Finally, we have an actual economic war in the Euro zone, just look at Cyprus…