Size matters when it comes to bank bail outs and European politics. In the most brazen bail out deal yet, the citizens of Cyprus just had their savings seized to give the money to the banks. I kid you not. Here is the Eurogroup statement:
These measures include the introduction of an upfront one-off stability levy applicable to resident and non-resident depositors. Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders.
Bail In means private citizens are responsible for the bail out. These masked terms mean anyone with over €100,000 has a whopping 9.9% of their money seized and anyone with deposits in a Cyprus bank below €100,000 is going to lose 6.75% of their savings deposited in Cyprus financial institutions. Unbelievable. The savings deposit seizure was announced when the banks are closed, so instead of a run on the banks, we have a run on the ATMs. Needless to say those ATMs are limited in withdrawals and also ran out of money fairly quickly . Lockdown of Cypriot Savings was preplanned and has already taken place before the announced private deposit seizure.
This so called bail out, orchestrated by the International Monetary Fund, the European Central Bank and the European Commission amounts to €10 billion in funds. Yet the seizing of almost 10% of deposits in bank accounts is estimated to bring in €6 billion, with all of those seized deposits going to re-capitalize Cyprus banks. The Republic of Cyprus was left holding the bag on Greek debt, after the hair cut given to Greece bond holders, which disproportionately left Cyprus taking huge losses Cyprus has been hammered by sovereign credit ratings downgrades as they were odd man out in the game of Greek sovereign debt swaps musical chairs.
The bail out terms also requires Cyprus to raise the corporate tax rate from 2.5% to 12.5%, which should possibly give flight to any multinationals operating in Cyprus for tax reasons. This below news report really exposes the bail out terms and how this is just toasting Cyprus citizens in their retirement savings and will decimate what's left of their economy.
The below BBC video clip captures one man threatening a Cyprus bank with a bulldozer. One interviewee rightly said this undermines the safety and security of the entire Cyprus economy. Spontaneous protests are also erupting as citizens gather at government headquarters.
Cyprus has already be subject to severe austerity measures from a previous bail out last November, where pensions and public salaries were cut, taxes were raised and a host of other public benefits curtailed
The reactions to this outrage are swift and furious. The Economist article headline shouted unfair, short sighted and self-defeating.
There is no moral imperative for whacking Cypriot widows and leaving senior bank bondholders untouched, as appears to be the case here; or not imposing any losses on sovereign-debt investors in Cyprus; or protecting depositors in the Greek operations of Cypriot banks, as has also happened. The euro zone may cloak this bail-out in the language of fairness but it is a highly selective treatment. Indeed, the euro zone’s insistence that this is a one-off makes that perfectly plain: with enough foreigners at risk and a small enough country to push around, you get an outcome like Cyprus.
The Washington Post called it the start of the next financial crisis.
For the past six months, the global financial markets have become increasingly complacent, convinced that the euro-zone crisis is, for practical purposes, over. Cyprus is the test of whether that is correct, or whether the complacency was instead misplaced.
The Cyprus President claimed he had no choice but to sell out his citizens, else the entire economy would collapse. Now where have we heard dire warnings like that previously before unprecedented bail out terms (TARP)?
President Nicos Anastasiades said Cyprus had little option but to accept the bailout deal, which imposes a levy on the country’s bank deposits — an unprecedented step in the eurozone crisis. Without it, he said, Cyprus’ banking system would have collapsed on Tuesday. Anastasiades said that’s when the European Central Bank would have stopped providing emergency funding to Cyprus’ troubled banks. Such a collapse would have driven the country to bankruptcy and possibly out of the eurozone, he said. The president said the deposit levy rescues banks, keeps the country’s debt load manageable, and avoids the risk of deeper pay cuts and tax hikes. “We’re not aiming to gloss over the situation,” he said in his first public statement after the EU-IMF meeting in Brussels agreed on the bailout early Saturday. “The solution taken may be painful, but it was the only one” worth taking.
Many Cypriots are calling the seizure of almost 10% of savings accounts outright robbery:
This is a clear-cut robbery,” said Andreas Moyseos, a former electrician who is now a pensioner in Nicosia, the capital. Iliana Andreadakis, a book critic, added: “This issue doesn’t only affect the people’s deposits, but also the prospect of the Cyprus economy. The E.U. has diminished its credibility.”
The Euozone has just crossed the Rubicon, directly making citizens pay for financial follies of the global banking system. Spain just issued a denial this would happen there as panic is spreading across the Eurozone. Some predict the same fate will happen to Spanish citizens and their savings as well as Portugal. Spain already has been decimated by austerity measures, all to save the banks. We fully expect to see Europeans stuffing their savings into their mattresses, buying hard commodities like gold and moving assets abroad as fast as they can. Seizing private savings will have repercussions and ripple across Europe as people realize nothing will stop governments from bailing out the financial sector at their expense.
Cyprus Parliament has to vote on the terms, scheduled for Sunday in an emergency session and with the country erupting in outrage, panic and protest, the bail out is uncertain to actually pass.
The reality is citizens are already paying dearly for the out of control financial crisis which turned into a sovereign debt crisis. Taking money directly from people's pockets just makes it official. Banks can get away with murder and will always be bailed out. They can even trade on sovereign debt and bring down entire nations by toasting their economies. Yet when it comes to the people, they will pay. They will pay with their jobs, their pensions, now their savings and all too often their very lives.