The Cypriot economy accounts for only two per cent of the combined output of the EU countries that use the euro. Still, the original bailout package for Cyprus that included an immediate tax on all saving accounts in Cypriot banks sent shivers around the world’s financial markets. This was an unprecedented step in Europe’s financial crisis. Some analysts described it as a “reckless” decision.
The respected Bloomberg News reported: “Such an attack on ordinary depositors is unjust, politically obtuse and economically destructive all at the same time. It has rightly fuelled popular outrage.”
The final deal with the EU and the IMF to secure a €10 billion bailout came just hours before a deadline set by the ECB and after a week of uncertainty about the future of Cyprus in the eurozone.
Essentially, Cyprus agreed to substantial restructuring of its banking system along with other important measures. Cyprus’s second largest bank – the Laiki Bank – is being closed down and deposits over €100,000 moved into a so-called ‘bad bank’. Deposits below €100,000 are being moved to the Bank of Cyprus, the country’s largest bank. Deposits at the Bank of Cyprus above €100,000 will be frozen.
Under this arrangement, no levy will be imposed on deposits but, at both banks, deposits above €100,000 could potentially be used by the Government to raise the billions of euros needed towards the bailout. By this measure, some expect that affected customers could lose up to 60 per cent of their deposits.
However, the new measures cannot be voted upon by the Cypriot Parliament because new bank structuring laws were agreed to and voted upon by MPs.
The reaction of bank customers over the next few weeks in Cyprus could have a contagion effect in other eurozone countries. Louise Cooper, of Cooper City, said: “Europeans now know that their savings could be used to bail out banks.”
This ‘reckless’ original decision of a levy on investments by the EU finance ministers could still have repercussions. The first to feel the effects of such a decision could possibly be those very countries already endangered by the euro crisis.
All Europe is now standing on shaky ground. Analysts said the crisis over Cyprus calls into question the viability of the euro common currency and could undermine those who favour regional unity.
The crisis could cause further risks to the fragile pro-EU, pro-euro political consensus. A large proportion of the Europe-wide electorate will be disconcerted by the long-term implications of the implied threat to the deposit guarantee and this sentiment will be assiduously promoted by anti-European politicians.
Certainly, those in the UK who are clamouring to see the country exit from the EU will have a field day and it could be that the planned referendum could produce a resounding ‘yes’ vote. Thus, besides a banking and financial crisis, the EU could also face political turbulence in the years to come.
It’s all a question of trust. Once people start doubting banking and financial institutions, imponderable forces start working that could shake the very foundations of stable institutions.
This time round, the eurozone is being threatened by ill-thought policies probably conceived on the wrong assumption that, Cyprus being so small, experimentation could be tried without any dire results to the whole.
It is a pity that this story came about at a time when the eurozone seemed to have passed the worst of its problems and was slowly regaining control of its shaky situation. The euro finance ministers stated that “the Cypriot programme is not a template but measures are tailor-made to the very exceptional Cypriot situation.” However, Bloomberg reports that one insider analyst went so far as to predict that the “Cypriot crisis resolution has potentially dangerous consequences for the euro area. It has certainly tarnished the attractiveness of the eurozone as a place where to invest. This could, in the end, translate into a downward pressure on the euro.”
However, this, as seems likely, will also end the now discredited Cypriot offshore banking model. Indeed, this could be considered as the only positive outcome of the whole chain of events associated with the banking crisis in Cyprus.
This should, at the same time, put Malta on the alert to avoid such offshore funds from finding their way through any means or route to these islands, thereby endangering our own stable banking institutions.
In the prevailing circumstances, this scenario is not a far-fetched possibility because Malta could present itself as an attractive alternative to such potentially dangerous customers. I am, however, reliably informed that the banks here are fully cognizant of the situation and vigilant to ensure that undesirable movements of this kind do not happen.