Cyprus Depositor Haircut: 25% Off the Top for the Rich
March 23, 2013 - 7:15 am
If Vladimir Putin was angry when the haircut was at 10% for big depositors, what do you think he’s going to say about the government of Cyprus absconding with 25% of bank deposits over 100,000 euros?
Cyprus said on Saturday it was looking at seizing a quarter of the value of big deposits at its largest bank as it races to raise the funds for a bailout from the European Union and avert financial collapse.
Finance Minister Michael Sarris said “significant progress” had been made in talks in Nicosia with officials from the European Union, European Central Bank and International Monetary Fund.
He confirmed discussions were centered on a possible levy of around 25 percent on holdings of over 100,000 euros at Bank of Cyprus, and expressed hope that a package could be ready by the end of the day for approval by parliament.
Cyprus faces a Monday deadline to clinch a bailout deal with the EU or the European Central Bank says it will cut off emergency cash to the island’s over-sized and stricken banks, spelling certain collapse and a potential exit from Europe’s single currency.
Amid signs of momentum, Cypriot and EU officials said Cypriot President Nicos Anastasiades was expected in Brussels on Sunday to meet EU leaders including Council President Herman Van Rompuy and Commission President Jose-Manuel Barroso, as well as IMF Managing Director Christine Lagarde and the head of the ECB, Mario Draghi.
Van Rompuy and Barroso canceled a planned EU-Japan summit in Tokyo to tend to the Cyprus saga and euro zone officials told Reuters that the bloc’s 17 finance ministers would meet on Sunday afternoon.
“Significant progress has been made in the direction of getting a deal, at least at the troika level,” Sarris told reporters.
He said a number of issues were still outstanding, but that a package could be ready “late this afternoon or early evening” for approval by parliament.
Putting the depositor haircut back on the table became necessary when Russia, fearing the instability of the Cyprus banking system, refused to bail out the wobbly institutions until after the EU infusion of cash. With this new plan to skim a quarter of the value of big depositors — many of them Russians — it is unknown if any company in Russia is going to have the desire to help the Cypriots out with their financial crisis.
Cyprus has taken additional steps to reform the banks:
Racing to placate its European partners, Cypriot lawmakers voted in late-night session on Friday to nationalize state pensions and split failing lenders into good and bad banks.
They also gave the government powers to impose capital controls on banks, anticipating a flood of money from the island when banks are due to reopen on Tuesday after more than a week of lockdown.
The plan to nationalize semi-state pension funds has, however, met with resistance, particularly from Germany which made clear that tapping pensions could be even more painful for ordinary Cypriots than a deposit levy.
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Grabbing retirement money seems to be all the rage among the socialist kleptocrats. It’s making their mouths water thinking about what they could do with all that cash. At the moment, your 401K might not be worth what it once was, but at least its safe. Whether it will be tomorrow is an open question.
These are all short-term fixes for Cyprus’s overfed, undercapitalized banks.
Cypriot leaders fear the damage the levy would do to the country’s offshore banking industry. The tottering banks hold 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros – enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own.
With the Island’s GDP at $24 billion, there are almost 3 times as much in bank deposits as the entire economy is worth. They are going to have to address that fundamental problem if they expect to put their financial house in order.
The parliament has the ability to throw a monkey wrench into the proceedings and blow up the deal. But since the alternative is unthinkable, they will likely swallow hard and pass the legislation.