Cyprus

President Nicos Anastasiades has again delayed an emergency parliamentary vote on the Cypriot bailout plan, and it looks as if these delays could last until the end of the week. The Cypriot government has also said it would keep banks closed until Thursday, in an attempt to stave off a possible bank run, although ATMs have already been run dry over the weekend since the announcement of the 10 billion euro bailout package. The reason the bailout is causing mass panic among Cypriots is the method by which it is being financed. Cyprus is the fifth member of the euro zone to receive a bailout, but in previous bailouts taxpayers, mostly from Germany and the Netherlands, financed the bulk of it. Conversely, the Cypriot bailout will be financed by the depositors of the banks being bailed out. Depositors with fewer than 100,000 Euros deposited will have a one-time tax of 6.75 percent levied on their account. Depositors with over 100,000 Euros deposited will have a one-time tax of 9.9 percent levied on their account. The graphic included in this BBC article explains the tax rate well. This is going to hit ordinary Cypriots, who account for about 43 percent of bank deposits in the country, hard. Non-European depositors, many of them Russian banks or businesses, account for about 21 percent of bank deposits in Cyprus and will also be effected. Anastasiades does have some ability to change the terms of the bailout, and there is speculation he will decrease the rate for those with under 100,000 Euros of deposits and increase the rates for those with over 100,000 Euros deposited. Still, there is growing sentiment in Cyprus that they are being used as a Guinea-Pigs. Cyprus contributes less than half of a percent of the total GDP of the euro zone and so if this “experiment” fails, it will be easy to forget about it—at least for the rest of the euro zone.  However, if this turns out to be a successful method of financing a bailout, it could be applied to other states in the future, possibly in Spain or Italy. Just the speculation over this has caused large fluctuations in the markets, with Asian stocks closing down about 2 percent, European stocks closing down about 1 percent and American markets dropping shortly after opening. What will happen in Cyprus this week is obviously important for the Cypriot people. However, if this so called “bail-in” goes through, people in Ireland, Greece, Spain, Italy, Portugal…they’re all going to wonder how safe their money is in the bank. In short, it could lead to an international bank run which completely destabilizes the fragile peace we’re currently seeing in the euro zone and send financial ripple effects around the world. 

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