Mario Draghi, president of the European Central Bank: his analysis of the euzozone crisis is flawed, argues Andrew Watt. Photograph: Lisi Niesner/Reuters
Over the course of the last week’s tense negotiations over a Cyprus bailout deal, much of the commentary has focused on the role of Europe’s finance ministers. But perhaps closer attention should be paid to Mario Draghi, the president of the European Central Bank. On 14 March Draghi made a presentation to heads of state and government on the economic situation in the euro area. His intent was to show the real reasons for the crisis and the counter-measures needed. In this he succeeded – although not in the way he intended.
Draghi presented two graphs that encapsulate his central argument: productivity growth in the surplus countries (Austria, Belgium, Germany, Luxembourg, Netherlands) was higher than in the deficit countries (France, Greece, Ireland, Italy, Portugal, Spain). But wage growth was much faster in the latter group. Structural reforms and wage moderation lead to success; structural rigidities and greedy trade unions lead to failure. QED.
According to the Frankfurter Allgemeine Zeitung, which reported the affair approvingly, the impact of Draghi’s intervention was devastating. François Hollande, the French president, who had earlier been calling for an end to austerity and for growth impulses, was, according to the newspaper, completely silenced after the ECB president had so clearly demonstrated, with incontrovertible evidence, what was wrong in Europe – or rather in certain countries in the eurozone – and what must be done.
Things are not as they seem, however. Draghi’s presentation contains a simple but fatal error – or should that be misrepresentation? As the note to the graphs indicates, the productivity measure is expressed in real terms. In other words, it shows how much more output an average worker produced in 2012 compared with 2000. So far so good. However, the wage measure that he uses, compensation per employee, is expressed in nominal terms (even if, interestingly, this is not expressly indicated on the slides). In other words, the productivity measure includes inflation, but the wage measure does not.
Cyprus Salvaged After EU Deal Shuts Bank to Get $13B
By Rebecca Christie, James G. Neuger & Patrick Donahue – Mar 25, 2013 10:24 AM CT
Cyprus dodged a disorderly sovereign default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid.
Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in an overnight negotiating melodrama that threatened to rekindle the European debt crisis and rattle markets.
“It’s been yet another hard day’s night,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels early today. “There were no optimal solutions available, only hard choices.”
It was the second time in nine days that Cyprus struck a deal with its euro partners and the International Monetary Fund, capping a tumultuous week that underscored the contradictions of euro-crisis management that has dominated European policy making for more than three years. Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009.
The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors. Efforts to win an alternative bailout from Russia, which loaned Cyprus 2.5 billion euros in 2011 when the nation was shut out of international markets, failed.
‘Playing Games’
“Nobody knows where we are heading,” said Epifanos Epifaniou, 50, who used to drive a delivery truck in Nicosia and has been unemployed for six months. “People are playing games with Cyprus. We are alone. Nobody is supporting us.”
The euro retreated 0.4 percent, trading at $1.2935 at 2:33 p.m. in Frankfurt, after initially rising as much as 0.5 percent. Stocks gained, with the Stoxx Europe 600 Index rising 0.5 percent. Italian 10-year bonds erased their decline since last month’s inconclusive election.
German Chancellor Angela Merkel lauded the agreement as lawmakers in her coalition embraced the package, which should go to a vote in Berlin in the coming weeks. The agreement goes a “long way” toward satisfying Germany’s Bundestag, Christian Democratic lawmaker Norbert Barthle said in an interview.
Bartering
The breakthrough came after Anastasiades bartered with officials including EU President Herman Van Rompuy, European Central Bank President Mario Draghi and IMF Managing Director Christine Lagarde. It was then sealed by the finance ministers, some of whom went out to dinner while the talks were ongoing.
With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the island’s financial system.
The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.
Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.
Debt Doubts
The squeezed banking industry will likely lead to a “sharp drop” in Cyprus’s gross domestic product this year and next, according to Reinhard Cluse, a London-based economist at UBS AG. As a result, the euro group’s debt-to-GDP ratio target of 100 percent by 2020 “must be doubted,” he said.
The Cypriot Finance Ministry said in a January presentation that bailing out the country may push debt to a peak of about 140 percent of GDP next year.
“Cyprus’s sovereign debt problems will remain an issue of concern — for European policy makers and for the markets,” Cluse wrote in a note to clients today.
Banks in Cyprus, which have been shut for the past week, will remain closed until further notice. Lawmakers in Cyprus voted last week to impose capital controls to prevent a run on deposits when they reopen.
The union representing Cypriot banking workers said today the Mediterranean island is faced with a “painful compromise,” according to a statement posted on its website. It urged employees to be ready to return to work when banks reopen.
Better Solution
“This solution we reached tonight doesn’t have the downsides that the solution of last week did,” said Dutch Finance Minister Jeroen Dijsselbloem, chairman of the euro ministers’ panel. He said the deal was beyond the range of “political possibilities” a week ago.
The Cypriot parliament won’t have to vote again because it has already passed laws on bank restructuring, officials said. On the creditors’ side, legislatures in Germany, Finland and the Netherlands may hold votes to approve loans to Cyprus from the European Stability Mechanism, the 500 billion-euro rescue fund.
Klaus Regling, managing director of the rescue fund, said approval by creditor governments in mid-April will pave the way for the first payouts to Cyprus in early May.
Lagarde said she will recommend that the IMF provide loans, without giving a figure. “There might have been a bit of friction here and there,” she said of the talks.
Solvent Banks
The next step lies with the ECB, which needs to keep funds flowing to solvent Cypriot banks to enable them to open. While Draghi and Executive Board member Joerg Asmussen left Brussels without commenting to reporters, a statement by the ministers said the bank will channel liquidity to Bank of Cyprus “in line with applicable rules.”
The seizure of larger deposits may spark tensions with Russia, the source of an estimated $31 billion in holdings in Cypriot banks according to Moody’s Investors Service. A Cypriot mission to Moscow last week failed to yield an alternative to the European-sponsored bailout.
Still, Russian President Vladimir Putin ordered his government to discuss restructuring a 2011 loan to Cyprus, Russian news service RIA Novosti cited a spokesman as saying.
The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.
Nine Months
In a replay of tensions over aid for Greece at the outset of the crisis, European governments had wrangled over aid for Cyprus for nine months, exposing holes in the revamped economic management system that was built in three years of emergency policymaking, often at all-night summits.
A tightening of Europe’s budget-deficit restrictions and new rules to penalize countries with unbalanced economies or asset bubbles failed to stop the rot in Cyprus, which makes up less than 0.2 percent of euro-region output.
Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, one group brandishing a banner that said: “It’s capitalism, stupid.”
Protesters during an anti- bailout rally in Nicosia, Cyprus, on March 24, 2013. Photographer: Petros Karadjias/AP Photo
0:17
March 25 (Bloomberg) — International Monetary Fund Managing Director Christine Lagarde says the so-called troika of the European Central Bank, European Commission and IMF is “doing fine” when asked by reporters about its future backing of bailouts. She spoke earlier today alongside Olli Rehn in Brussels following an emergency meeting of euro-area finance ministers, who agreed to a 10 billion-euro ($13 billion) bailout for Cyprus. (Source: Bloomberg)
March 22 (Bloomberg) — Bloomberg Television’s Ryan Chilcote reports on how the Russian population living and banking in Cyprus could be affected by the current crisis. He speaks from Limassol, Cyprus, on Bloomberg’s “The Pulse.” (Source: Bloomberg)
1:35
March 25 (Bloomberg) — As Cyprus dodges a disorderly default and unprecedented exit from the euro currency by winning a 10 billion-euro ($13 billion) bailout, Cypriots are finding cash hard to come by. Bloomberg Television’s Ryan Chilcote reports from Nicosia. (Source: Bloomberg)
9:21
March 25 (Bloomberg) — Christopher Pissarides, the head of Cyprus’s economic policy council, talks about the island nation’s bailout package and the outlook for its future membership of the euro zone. He speaks from Nicosia with Guy Johnson and Francine Lacqua on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)
6:36
March 25 (Bloomberg) — Stelios Platis, managing director of MAP S.Platis, talks about Cyprus’s deal with the European Union to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout. He speaks from Cyprus on Bloomberg Television’s “Countdown.” (Source: Bloomberg)
4:49
March 25 (Bloomberg) — Nicholas Papadopoulos, Cypriot lawmaker and chairman of the parliamentary finance committee, discusses the consequences of the nation’s 10 billion-euro ($13 billion) bailout. He speaks in Nicosia with Ryan Chilcote on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)
4:48
March 26 (Bloomberg) — Philippe D’Arvisenet, chief global economist at BNP Paribas SA, talks about Europe’s sovereign debt crisis and the outlook for the euro. Cyprus dodged a disorderly sovereign default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid. D’Arvisenet speaks in Singapore with Haslinda Amin on Bloomberg Television’s “On the Move.” (Source: Bloomberg)
Jeroen Dijsselbloem, the Netherlands’s finance minister and president of the Eurogroup, center, speaks as Christine Lagarde, managing director of the International Monetary Fund, left, and Olli Rehn, economic and monetary affairs commissioner for the European Union, listen during a news conference following the Eurogroup meeting in Brussels on March 25, 2013. Photographer: Jock Fistick/Bloomberg
Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Photographer: Simon Dawson/Bloomberg
The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl, the second biggest. Photographer: Simon Dawson/Bloomberg
Germany and The Central Bank are Pressuring Cyprus to steal from it’s citizens as and answer for fiscal irresponsibility. The Central Bank has ordered banks to block citizens access to their own personal accounts. Thereby barring access to their own money. I suppose they are biding their time making sure that people do not empty their accounts before the decision to allow them to steal the money is reached.
Since when is this kind of blatant theft not an unlawful act? Who do they EU and the Central Bank think they are to be coercing the government to commit this crime against it’s people?
Cyprus’s central bank has written to the island’s lenders to ask them to block customer’s transfers and payments, according to reports on the island.
Cypriot website 24h revealed on Sunday that the Central Bank of Cyprus wrote to Cypriot lenders on Saturday, March 16 to ask them to stop all form of payments from their accounts, even those that were from one account at the bank to another.
The measure comes after the Eurogroup asked Cyprus to impose a one-off tax on depositors as part of its bailout.
Kathimerini English Edition understands that the capital controls do not apply to the units of Cypriot banks in Greece. Normal restrictions on cash withdrawals and electronic transfers are in place.
The depositor tax will not apply to Cypriot bank units in Greece but the branches are set to be absored by a Greek lender by Tuesday.
The proposed levy had caused an outcry among many Cypriots
Germany’s finance minister has warned Cyprus that its crisis-stricken banks may never be able to reopen if it rejects the terms of a bailout.
Wolfgang Schaeuble said major Cypriot banks were “insolvent if there are no emergency funds”.
He was speaking after the Cypriot parliament rejected an international bailout deal that would have imposed a one-off tax on bank deposits.
Frantic talks are under way to try to agree an alternative plan.
Leaders of political parties in Cyprus are due to meet later after parliament rejected the controversial levy, proposed as part of a 10bn-euro (£8.7bn; $13bn) bailout package.
The BBC’s Mark Lowen, in Nicosia, says the country is in turmoil and the eurozone’s plan has completely unravelled,
Analysis
Mark Lowen BBC News, Nicosia
There may have been jubilation among many Cypriots at Tuesday night’s parliamentary defeat of the hated banking tax, but now the country faces a tough reality.
The EU bailout has been derailed and Cyprus is edging towards bankruptcy. But talks are also continuing with the EU to find a credible alternative.
The eurozone’s third smallest economy has just sent a resounding message of defiance to Brussels. And the impact will spread far beyond this tiny island.
Not a single MP voted in favour of the controversial deal, sending a clear message to Brussels that the strategy needs a drastic rethink, our correspondent adds.
Late on Tuesday, Mr Schaeuble said that he “regretted” the vote.
“The ECB (European Central Bank) has made it clear that without a reform programme for Cyprus the aid can’t continue. Someone has to explain this to the Cypriots and I think there’s a danger that they won’t be able to open the banks again at all,” he said.
“Two big Cypriot banks are insolvent if there are no emergency funds from the European Central Bank,” Mr Schaeuble added.
Cypriot President Nicos Anastasiades called the talks between party leaders when it became clear that the measure would not be passed by parliament.
Fearing a run on accounts, Cyprus has shut its banks until at least Thursday. The local stock exchange also remains closed.
Cyprus’ banks were badly exposed to Greece, which has itself been the recipient of two huge bailouts.
People line up at an ATM in Nicosia to withdraw cash on Thursday.
Patrick Baz/AFP/Getty Images
The clock is ticking on Cyprus’ fiscal cliff.
The European Central Bank has given the Mediterranean country just four days to come up with its own bailout plan, or a eurozone lifeline to its struggling banks will be severed.
The ultimatum comes after Cypriot lawmakers on Tuesday rejected a highly unpopular proposal put forward by the European Central bank, the European Commission and the International Monetary Fund to give the country’s banks half of a $13 billion bailout package if they can raise the other half from a steep levy on the country’s personal savings accounts.
Since then, the Cyprus government has been struggling to come up with a “Plan B” that will satisfy international lenders. If Cyprus can’t do it by Monday, the ECB will pull the plug on Cypriot banks, which would likely precipitate a collapse of the island’s financial institutions and send shock waves through European and world markets.
Update at 2:40 p.m. ET: Cyprus Bank To Be Restructured:
NPR’s Joanna Kakissis reports that the governor of Cyprus’ central bank, Panicos Demetriades, says country’s second largest bank, Cyprus Popular Bank, will be restructured to forestall its imminent collapse next week. Cyprus Popular Bank has placed a $336 (260 euro) limit on ATM withdrawals.
Our original post:
Kakissis, reporting from the Cypriot capital Nicosia, says the country’s banks were drained by exposure to the Greek debt crisis. But EU and IMF leaders see the island as a haven for offshore investment, especially by wealthy Russians, and want depositors to pay for part of a bailout.
Banks have been closed until Tuesday to prevent a bank run, but ATMs have been restocked so people can withdraw money, Kakissis says.
The Parliament in Cyprus could vote on a plan to raise the $7.5 billion as early as Thursday
Of course people will protest. They have closed the banks and block access to their money. I would dare say it is a very logical reaction to being robbed,wouldn’t you ?
And yet it is typical of this type of strong arm tactic for the victim to be treated as the criminal,while the criminal is protected. Truly ironic is it not ?
Demonstrators outside the House of Representatives yesterday wearing Angela Merkel masks
AROUND 1,000 people gathered outside Parliament yesterday despite a vote on the proposed haircut being postponed until today at 6pm.
Around half of the protesters dispersed quite quickly after receiving news that the vote had been put back, planning on regrouping outside the House today.
“I’m here for the same reason as everyone else to protest the bill and we will come tomorrow and the next day if required,” 56-year-old insurance salesman Lambros Kannaouros said.
“The decision to make the people pay is unfair,” he added.
Petros Heracleous a 26-year-old unemployed protester believed that attempts to restructure the haircut were pre-planned to make the people think that the politicians were trying to change something. “We prefer to keep our pride instead of suffering the repercussions of a haircut,” he said.
Forty-year-old telecommunications regulator, Yiannos Demetriou felt that a haircut would go against human rights and against the Cyprus constitution. “They are trying to take advantage of us so they can take our natural gas and impose a solution to the Cyprus problem that will suit foreign powers,” he said. “If Anastasiades is assuming the political cost of the haircut then he should call for a referendum or even call a general election,” he added.
Cyprus finance minister Michalis Saris arrives to meet his Russian counterpart in Moscow. Photo:
Banks in Cyprus are to remain closed on Thursday and Friday, the government has said, amid continuing uncertainty over an EU bailout that required a 10 per cent tax on savings.
President Nicos Anastasiades will chair a meeting with the parliamentary party leaders tomorrow at 9.30am at the Presidential Palace.
Russian Prime Minister Dmitry Medvedev has criticised the EU and Cyprus’ handling of the country’s ongoing economic crisis, saying they are acting “like a bull in a china shop”, the state-run news agency RIA Novosti reported.
Meanwhile, Prime Minister David Cameron has reaffirmed that any British military or government personnel in Cyprus would not lose their savings due to the crisis.
Local news in Cyprus is reporting an escalation in the protests that have begun in the wake of attempts by EU chiefs to confiscate the savings of depositors. The news of possible bank closures has enraged the public. It appears that in order to keep things under control, the Central Bank is discussing a possible bank merger rather than a full shut down.
The Central Bank of Cyprus today intervened to quash frantic reports that Cyprus Popular Bank is to be closed down.
The reports sent hundreds of Cyprus Popular Bank employees and holders of the bank’s bonds out into the streets. Police deployed a strong force outside the Bank’s headquarters in the capital Nicosia to prevent them smashing into the building. (Source)
Here is a video showing police in riot gear on the scene:
Cyprus Broadcasting Corporation says the following:
The European Central Bank today said it had decided to allow the Central Bank of Cyprus to keep providing banks with emergency funding until this coming Monday.
An ECB statement said that thereafter, Emergency Liquidity Assistance can only be considered if a rescue programme is in place that would ensure the solvency of the banks involved. (Source)
Meanwhile, President Anastasiades supposedly has a Plan B ready:
Cyprus’s political leadership today decided on a package of measures dubbed “plan B” to avert a financial meltdown, as the finance minister is engaged in rescue talks with Russian officials in Moscow….
No details of the plan were immediately announced, but Averof Neophytou, a close associate of President Nicos Anastasiades said that there had been a unanimous decision to establish a “Solidarity Fund”. (Source)
Recent photos of the protests were posted at ZeroHedge, which you can see HERE. One protester can be seen holding a sign that says, “Where is the solidarity?”
We’ll keep you posted as this develops. Previous updates and videos can be found below…
ATMs in Cyprus were drained over the weekend, electronic transfers were halted, and riots ensued following a decision by European Union chiefs to raid private savings accounts to help pay for the country’s $13 billion bailout. It was believed that there were plans to stretch a bank holiday to at least one week, while the exact measures were decided upon. However, yesterday the Cypriot parliament rejected the scheme outright, leading many to speculate that this would be the start of something even worse.
Sure enough, much like the U.S. Federal Reserve threatened martial law and blood in the streets if Congress didn’t accept sweeping bailouts in 2008, now Germany is saying that Cypriot banks might never reopen after parliament’s decision:
Germany’s finance minister, Wolfgang Schaeuble said major Cypriot banks were “insolvent if there are no emergency funds,” according to a BBC report, meaning savers might lose all their money if no deal was reached. (Source)
There is extreme worry that if the banks do reopen, capital flight is all but assured. Meanwhile, similar confiscation schemes are being proposed for Italy and New Zealand (more on that below), spurring questions about which other nations are in line for a “haircut” . . . perhaps better called “the chopping block.”
Whether or not Cyprus gets its bailout in one form or another — perhaps from Russia — this is a precedent-setting crisis that is already leading to such a level of distrust in Cyprus that merchants are even refusing credit card payments. This is indeed shaping up to be a potential “Lehman Brothers Moment” with ramifications that could extend even beyond the troubled nations of Europe.
The euro zone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risk of a wider run on savings.
….
In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zone finance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.
Cyprus president Nicos Anastasiades agreed to the deal, which completely reversed his previous assurances that it would not happen. It sets a very dangerous precedent for future bailouts. As if brutal austerity wasn’t enough, the EU is now demanding a bailout tax making citizens and expat depositors alike personally liable for government and private bank debts. Reuters also notes that according to a draft of the legislation, criminal penalties of up to 3 years in jail and 50,000 euros could be imposed upon anyone who doesn’t comply.
Most of the 10 billion euros will go to bail out Cypriot banks, which took a blow when their substantial holdings of Greek government bonds were written down as part of that country’s second bailout.
Britain has 60,000 depositors in Cypriot banks, including thousands of military and government personnel stationed on the island. George Osborne highlighted that Cypriot banks in England would not be subjected to the tax (originally proposed at 6.75% for accounts under 100,000 Euros; 9.9% for those over 100,000), but expat depositors apparently will — government and military excluded:
George Osborne vowed today that those serving in Britain’s military or government in Cyprus will be protected after European finance chiefs ordered an unprecedented raid on personal bank accounts.
Up to 60,000 British savers are to lose thousands of pounds each as expats in Cyprus have their savings decimated in part of a painful bid to bail out the bankrupt island.
The Chancellor said the financial situation in Cyprus was ‘an example of what happens if you don’t show the world that you can pay your way’, adding: ‘We are not part of the bailout.’ (Source)
The tax is being justified as a last-ditch effort to raise money and keep Cyprus from supposedly causing a domino effect across the Eurozone as indebted nations begin to collapse. Cyprus had set itself up as a strong banking center for investors, but many are outraged over Anastasiades’ about-face:
Those affected will include rich Russians with deposits in Cyprus and Europeans who have retired to the island, as well as Cypriots themselves.
“I’m furious,” said Chris Drake, a former Middle East correspondent for the BBC who lives in Cyprus. “There were plenty of opportunities to take our money out; we didn’t because we were promised it was a red line which would not be crossed.”
“I’ve lost several thousand,” he told Reuters.
ZeroHedge reports that it is those “rich Russians” who could wind up angriest. Eurogroup had suggested that depositors under 100,000 euros should maintain their insurance against such a scheme, but it is possible that larger depositors will absorb their percentage by moving the top percentage tax to 15.6%.
The Eurogroup will give Cyprus more flexibility on bank levy, and that Cyprus should safeguard depositors under €100,000, even as the full €5.8 billion deposit goal must still be hit.
….
(The) Russian response to the discovery that haircuts on big deposits just rose from 9.9% to over 15.6% will hardly be warm and cuddly. Now may be a good time to ban gun (and plutonium) sales to angry Russian billionaire oligarchs. (Source)
However, the changes continue today, 3/19.
The President just proposed the ‘levy’ on deposits begin at EUR 20,000 just hours ahead of today’s planned vote.
CYPRUS REVISED BILL SEES NO LEVY ON DEPOSITS UP TO EU 20,000
However, it is still theft of private property which appears to be the philosophical stumbling block for the parties involved and therefore today’s vote appears to be delayed:
ANASTASIADES TO MEET PARTY LEADERS 9 AM TOMORROW: SPOKESPERSON
CYPRUS PARLIAMENT BANK-LEVY VOTE MAY HAPPEN TOMORROW, CYBC SAYS (Source)
Members of the troika of international lenders arrive at the Presidential Palace yesterday (Christos Theodorides)
THE government yesterday ordered banks to stay shut until next week as it toyed with the idea of re-submitting a proposal on tax deposits – at a much lower rate than the previous scheme – as it scrambled to avert a financial meltdown.
The government was yesterday trying to find alternative solutions after parliament on Tuesday rejected the terms of a bailout from the European Union and turned instead to Russia for a lifeline.
“We don’t have days or weeks, we have only hours to save our country,” Averof Neophytou, ruling DISY deputy chairman, told reporters as crisis talks in Nicosia dragged into the evening.
Neophytou tried to get the message through to other parties.
“I believe we will not be the cursed generation of politicians who will let our country go bankrupt,” Neophytou added.
It was suggested yesterday that the government may submit a bill today proposing a haircut on deposits but at lower rates than legislation that was rejected by parliament on Tuesday.
MPs threw out a proposed tax on bank deposits in exchange for a €10-billion bailout from the EU, a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.
The tax — 6.7 per cent on deposits under €100,000 and 9.9 per cent on deposits over €100,000 — was designed to fetch the government €5.8 billion.
The shortfall from the lower rates could be covered by nationalising the provident funds of semi-state companies.
Bank of Cyprus vice president Evdokimos Xenophontos said the situation could be reversed but warned against touching foreign deposits.
“We cannot do it to foreign depositors who trusted us. This could be theft,” he told reporters after meeting President Nicos Anastasiades last night.
Xenophontos said only Cypriots must foot the bill in exchange for bank warrants, better interest rates, etc.
“If we protect them (foreigners) even if they leave, they will come back. We lived through an invasion and we overcame the difficulties on our own,” he said.
THE NUMBER of non-Cypriots living on the island number over 170.000, the vast majority of whom would have Cypriot bank accounts and are would be affected by a deposit haircut.
The full figure of 170,383 is from the population census carried out by the statistical services in October 2011, published in January this year.
Of the 170,383 non-Cypriots living in Cyprus at the time, 106,270 were EU citizens and 64,113 were non-European. From the European citizens, statistics show that the number of Greeks was the highest at 29,321, then Britons at 24,046, Romanians 23,706, and Bulgarians 18,536.
From the non-European citizen, Filippinos numbered 9,413, Russians 8,164, Sri Lankans 7,269, and Vietnamese 7,028.
Greeks, Romanians and Bulgarians mainly resided in Nicosia while most UK citizens resided in coastal areas such as, Paphos during the research period. The majority of Russian citizens resided in Limassol.
From the non-European citizens the majority lived in Nicosia.
“The population census is carried out once every ten years,” Georgia Ioannou, a statistics officer said. “Since 1982, we have been conducting this survey on October 1. We do not do the survey during the summer period as many people are on holiday and we also do not want to visit people’s homes during Christmas or Easter,” she said.
“We use the traditional method of going from home to home with a questionnaire. We mark down all residents of Cyprus who have been in the country for more than one year or are planning to stay for over a year,” Ioannou said.
The population of Cyprus during the latest population census was 840,407 people, 431,627 were women compared to 408,780 men. From the 106.270 European citizens, 53,607 were men and 52,663 were women. From the 64,113 Non-European citizens, the women were 41,114 and men were 22,999.
ATMs in Cyprus were drained over the weekend, electronic transfers were halted, and riots ensued following a decision by European Union chiefs to raid private savings accounts to help pay for the country’s $13 billion bailout. It was believed that there were plans to stretch a bank holiday to at least one week, while the exact measures were decided upon. However, yesterday the Cypriot parliament rejected the scheme outright, leading many to speculate that this would be the start of something even worse.
Sure enough, much like the U.S. Federal Reserve threatened martial law and blood in the streets if Congress didn’t accept sweeping bailouts in 2008, now Germany is saying that Cypriot banks might never reopen after parliament’s decision:
Germany’s finance minister, Wolfgang Schaeuble said major Cypriot banks were “insolvent if there are no emergency funds,” according to a BBC report, meaning savers might lose all their money if no deal was reached. (Source) There is extreme worry that if the banks do reopen, capital flight is all but assured. Meanwhile, similar confiscation schemes are being proposed for Italy and New Zealand (more on that below), spurring questions about which other nations are in line for a “haircut” . . . perhaps better called “the chopping block.”
Whether or not Cyprus gets its bailout in one form or another — perhaps from Russia — this is a precedent-setting crisis that is already leading to such a level of distrust in Cyprus that merchants are even refusing credit card payments. This is indeed shaping up to be a potential “Lehman Brothers Moment” with ramifications that could extend even beyond the troubled nations of Europe.
The euro zone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risk of a wider run on savings.
….
In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zone finance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.
Cyprus president Nicos Anastasiades agreed to the deal, which completely reversed his previous assurances that it would not happen. It sets a very dangerous precedent for future bailouts. As if brutal austerity wasn’t enough, the EU is now demanding a bailout tax making citizens and expat depositors alike personally liable for government and private bank debts. Reuters also notes that according to a draft of the legislation, criminal penalties of up to 3 years in jail and 50,000 euros could be imposed upon anyone who doesn’t comply.
The Cypriot central bank has denied reports today that stricken Cyprus Popular Bank, the island’s second-largest lender, is to be closed down, Reuters is reporting.
“We deny these reports. Efforts are under way right now to find the best possible solution for this bank,” Central Bank spokeswoman Aliki Stylianou told state television.
A man reads a note on the shutters of a Cyprus Popular Bank (CPB) branch informing customers that the bank will remain closed. Credit: Reuters
Cyprus pins hopes on creation of solidarity fund as ECB threatens to cut off lending
Political leaders in Cyprus have agreed that their country should form an investment fund to raise the capital needed to agree a bailout with the eurozone and International Monetary Fund and avert a collapse of its banking system.
The deputy leader of Cyprus’s conservative DISY party Averof Neofytou announced the agreement within a few hours of the European Central Bank saying that it was set to cut off lending to insolvent Cypriot banks on Monday.
“We will find a solution,” said Neofytou. “We have no other choice. We are making a united effort to avoid our country’s bankruptcy and I think we will succeed.”
Nicosia plans to create a fund collateralized by state assets, possibly including natural gas revenues, church property and social security fund reserves. A proposal is due to be submitted to the House of Representatives on Thursday evening.
A government official who declined to be named told Bloomberg that some kind of deposit tax was not being ruled out.
Meanwhile, Finance Minister Michalis Sarris continued talks in Moscow, with Cyprus hoping there would be Russian interest in Cypriot banks or in contributing to the investment fund being created.
Sarris told Cypriot state broadcaster that he would meet two Russian ministers on Thursday evening and that the main aim would be to convince Moscow to invest in the wealth fund to be set up by the Nicosia government.
“We are asking for help clearly, but something that would make also economic sense for Russia,” Sarris told reporters earlier.
Cyprus is also asking Moscow to extend the maturity of an existing 2.5-billion-euro loan. Sarris said that Russia was unable to provide Cyprus with a new loan.
Neofytou said that Cyprus would welcome Russian assistance but still needed to balance this against the requirements of remaining in the eurozone.
“We cannot reject any form of help but we are in the euros and we need the continue support of the ECB for liquidity,” he said. “Any support is welcome but we should not forget that we are in Europe and we need European institutions to stabilize our economy.”
I seem to recall a country that was also being pressured to accept the terms of a bailout. Its people were upset and angered over the aspect of having to bailout a bank for their fiscal irresponsibility. The government listened to it’s People and rejected the terms of the bailout. Lo and behold the world did not implode and they are still there. Doing quite nicely I might add….
When I first heard Iceland was allowing its taxpayers to vote on whether or not they should repay $5.7 billion that one of its defunct banks owes the U.K. and Netherlands, the angry taxpayer in me took hold and I hoped that they’d vote against repaying.
Turns out the Icelanders felt the same the resentment and said so today when they voted down a deal to repay the British and Dutch. Their rejection essentially revolts against the idea that taxpayers should be held responsible for banks’ financial problems.
Think about it this way, if given the choice back in 2008, would you have paid your share to save AIG, or any other financial institution, and in turn its creditors?
The situation in Iceland is a little trickier than that since the institution in question was a bank, Landsbanki Islands, whose depositors included folks from Britain and the Netherlands. When Landsbanki Islands blew up in 2008 leaving depositors without their money, the British and Dutch government stepped in and bailed out their respective depositors to keep them from panicking.
Now though, those governments want that money back. And since whatever assets are left of Landsbanki Islands are not enough to recover the total $5.7 billion, the people of Iceland are left footing what remains of the bill–estimated to be around $2 billion.
Help comes from Finland, Norway, Denmark and Sweden
The IMF will pump about $827 million into the Icelandic economy immediately
The goal is to stabilize the country’s finances and shore up its currency
Iceland is facing severe recession after a series of bank failures in October
(CNN) — Nordic countries agreed to lend struggling Iceland $2.5 billion to help it recover from a series of crippling bank failures, bolstering a $2.1 billion aid package from the International Monetary Fund, their governments announced Thursday.
Prime Minister Geir Haarde has been trying to drum up support for Iceland’s bailout.
“This is a first step to get Iceland out of its current serious financial and economic situation,” the governments of Finland, Norway, Denmark and Sweden announced in a joint statement. “The banking crisis in Iceland is of unprecedented proportions and has serious implications for the country’s economy.”
The statement follows the IMF’s decision on Wednesday to pump about $827 million into the Icelandic economy immediately, with another $1.3 billion coming in eight installments. Both moves are aimed at stabilizing Iceland’s finances and shoring up its currency, which plummeted after a series of bank failures in October.
Iceland sought IMF help after its government was forced to nationalize three banks to head off a complete collapse of its financial system. Trading on the country’s stock market was suspended for nearly a week, economic growth nearly flatlined and inflation jumped to more than 12 percent.
“As a result,Iceland is facing a severe recession, given the high debt level in the economy and significant dependence of the private sector on foreign currency and inflation-indexed debt,” John Lipsky, the IMF’s acting chairman, said in a statement announcing the decision.
A look at what Putin gains—newfound economic might
It’s mere coincidence, of course. But to Vladimir Putin, the man who called the Soviet Union’s demise the “greatest geopolitical catastrophe” of the 20th century, just the thought of saving Iceland’s hide must seem like redemption.
In 1986 Iceland hosted the Reykjavik summit between Ronald Reagan and Mikhail Gorbachev, a meeting momentous for its unplanned evolution into a conversation on nuclear disarmament between the two leaders—but also as a catalyst for the 1991 August coup against Gorbachev that sparked the USSR’s implosion.
“It was a sign of change in the Soviet Union, in many ways in the decline of the Soviet Union,” says Shamil Yenikeyeff, a Russia expert at the Oxford Institute for Energy Studies.
ARC DE TRIOMPHE
Now Reykjavik is asking Moscow for a $5.5 billion emergency loan to prop up its economy after its banking system collapsed two weeks ago amid the global credit disaster. And Russia is positioned, as a revitalized once-superpower flush with cash, to rescue Iceland, a NATO member praised for its chart-topping living standard! To Putin and the Kremlin, could there be a sweeter arc to the last two decades of Russian history?
That may be putting it a bit too strongly: even if Moscow grants the loan, Iceland will need a lot more cash, probably from the International Monetary Fund’s pocket. Still, Putin’s famous lament suggests a partial answer to the question that’s abounded since reports of the loan surfaced: What’s Russia after here?
True, $5.5 billion isn’t a staggering sum for a country with around 100 times as much in cash reserves. Nor is the loan a done deal: agreement wasn’t reached in the first round of negotiations last week. But the gesture alone—even the possibility—is significant. After all, Russia was a financial and political basket case just 10 years ago and has its own economic woes at the moment.
Pride, surely, isn’t the only prize: the seas of the “High North” are rich in fish and energy resources, and Moscow needs to show the world it’s a good global citizen after trouncing Georgia this summer. But for a leadership keenly aware of Russia’s less than auspicious place in modern history texts, this is an opportunity to further demonstrate that indeed there is a new world order, and it’s not the one George H.W. Bush foresaw in 1990.
(Reuters) – Cypriot President Nicos Anastasiades said on Saturday a levy on bank depositors was a painful decision he had to make in order to obtain financial aid, or else the island’s economy would have gone bankrupt.
Anastasiades, elected three weeks ago with a pledge to negotiate a swift bailout, said refusal to agree to terms would have led to the collapse of the island’s two largest banks.
The president said he would make a state address on Sunday, when the island’s parliament was scheduled to meet in an emergency session to decide whether to approve the measure.
The eastern Mediterranean nation becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial aid.
But in a radical departure from previous aid packages – and one which triggered fury across the island – euro zonefinance ministers forced Cyprus’s savers to forfeit up to 10 percent of their deposits to raise almost 6 billion euros.
“On Tuesday … we would either chose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” Anastasiades said in a written statement.
Had Cyprus chosen the “catastrophic scenario”, he said, from Tuesday one of the two distressed banks would have ceased to operate since the European Central Bank had already decided to terminate provision of emergency liquidity assistance (ELA).
“The second bank would suspend its work, and neither could avoid collapse,” he said.
Although he did not name the banks, he was referring to Cyprus Popular Bank, the recipient of the ELA facility for months, and Bank of Cyprus, the island’s largest bank.
If the banks collapsed, he said, the state would be obliged to compensate depositors with a bill potentially reaching 30 billion euros, which the state would be unable to pay.
Thousands of Cypriots converged on automatic teller machines on Saturday to withdraw cash, leaving many inoperative by mid-afternoon. Co-operative credit societies, normally open for business on Saturdays, were forced to close to prevent a run on deposits.
(Reporting by Michele Kambas; Editing by Jason Webb)
Cyprus’ savers bear brunt of unprecedented bailout
By Annika Breidthardt and Robin Emmott and Michele Kambas
BRUSSELS/NICOSIA | Sat Mar 16, 2013 7:52pm EDT
(Reuters) – The euro zone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risk of a wider run on savings.
The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region’s debt crisis.
In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zonefinance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.
Parliament was due to meet on Sunday to vote on the measure, and approval was far from assured.
The decision prompted a run on cashpoints, most of which were depleted by mid afternoon, and co-operative credit societies closed to prevent angry savers withdrawing deposits.
Almost half Cyprus’s bank depositors are believed to be non-resident Russians, but most queuing on Saturday at automatic teller machines appeared to be Cypriots.
President Nicos Anastasiades, elected three weeks ago with a pledge to negotiate a swift bailout, said refusal to agree to terms would have led to the collapse of the two largest banks.
“On Tuesday … We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” Anastasiades said in written statement.
In several statements since his election, he had previously categorically ruled out a deposit haircut.
“My initial reaction is one of shock,” said Nicholas Papadopoulos, head of parliament’s financial affairs committee. “This decision is much worse than what we expected and contrary to what the government was assuring us, right up until last night,” he told Reuters, without saying whether he would back the measure or whether he thought it would pass.
Papadopoulos is vice-chairman of the Democratic Party, a partner in Cyprus’s centre-right ruling coalition and whose support in parliament will be crucial to pass any haircut.
Parliament was expected to convene from 1600 local (1400 GMT) on Sunday to discuss the emergency legislation. Without parliamentary approval, a haircut cannot take place.
Analysis: Cyprus bank levy risks dangerous euro zone precedent
By Mike Peacock
LONDON | Sun Mar 17, 2013 12:55pm EDT
(Reuters) – A hit imposed on Cypriot bank depositors by the euro zone has shocked and alarmed politicians and bankers who fear the currency bloc has set a precedent that will unnerve investors and citizens alike.
After all-night Friday talks, euro finance ministers agreed a 10 billion euro ($13 billion) bailout for the stricken Mediterranean island and said since so much of its debt was rooted in its banks, that sector would have to bear a large part of the burden.
In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across Cyprus – the ministers are forcing the nation’s savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.
The European Central Bank’s pledge to buy euro zone government bonds in unlimited amounts if needed has calmed the beleaguered currency bloc for the past five months. But if investors fear the Cypriot template could be repeated in any future rescues, that calm could be shattered.
Without a bailout, Cyprus would default, which could unravel the investor confidence fostered by the ECB.
Politicians, bankers and analysts said the levy could undermine banks in other euro zone countries, even though the ministers insisted it was a one-off and Cyprus represents just 0.2 percent of euro zone economic output.
“The unprecedented move is an extreme measure, and in our view it will spread some panic across the EMU periphery, and we cannot rule out some capital outflows,” said Annalisa Piazza at Newedge Strategy.
“In the short run we expect some effects on periphery’s (bond yield) spreads and some weakening of the euro cannot be ruled out,” Piazza said.
The decision sent Cypriots scurrying to the cash points, most of which were emptied within hours. Most have been unable to access their bank accounts since Saturday morning, a move unlikely to engender calm.
Euro zone policymakers made a point of saying they would monitor any signs of money moving out of Cyprus but did not say how they might react in the event.
“For us, Cyprus is systemically relevant. Despite the small size of the economy, disorderly developments in Cyprus could undermine the important progress made in 2012 in stabilizing the euro zone,” ECB policymaker Joerg Asmussen said after the Eurogroup meeting concluded before dawn on Saturday.
A Cypriot bank holiday on Monday will limit any immediate reaction. The deposit levy – set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that – will be imposed on Tuesday, if voted through in parliament.
That is not certain to happen, but fear of the alternative – probable default – will focus minds.
TROOPS whose savings are set to be ransacked in a European Union bank raid will get full compensation from the Government, George Osborne said yesterday.
Cyprus is in financial turmoilThousands of military personnel stationed in Cyprus are expected to be among British expat victims of a swingeing levy of up to 10 per cent on bank deposits. It has been imposed by the Cypriot government as part of a £9billion EU bail-out deal.Up to 60,000 UK citizens could lose part of their nest eggs in the astonishing move designed to shore up the debt-laden Cypriot economy.
The Chancellor announced that troops and UK government officials in Cyprus will get compensation. But most expats will get nothing.
Mr Osborne said on the BBC’s Andrew Marr Show: “For people serving in our military and our government out in Cyprus, we are going to compensate anyone affected by this bank tax.”
Treasury officials estimate that around 3,000 UK military personnel and 150 civil servants live in Cyprus.
The Chancellor has moved quickly to ease the fears of Britons
For people serving in our military and our government out in Cyprus, we are going to compensate anyone affected by this bank tax.
Chancellor George Osborne
Under the bail-out plan, a 10 per cent levy will be imposed on deposits of £85,000 or more and 6.75 per cent on lower sums. Cypriot government ministers will today debate whether to proceed with the measure, which has been sanctioned by EU officials.British expats, who are estimated to have £1.7billion in deposits and could lose up to £170million as part of the levy, were furious yesterday.
Sue Hall, 54, a British businesswoman living on the island, feared her firm could lose around £3,500.
She said: “It is outrageous. This is down to the EU, they are picking on Cyprus because it’s a small country.”
Cypriot President Nicos Anastasiades speaking to the people of Cyprus in a televised address
Dennis Wheatley, 78, a former postman from Coventry, pleaded with the Prime Minister to help pensioners. He says the tax will cost him around £1,300. “I came here because I wanted a wonderful life in retirement,” he said. “David Cameron should be making sure pensioners are looked after.”
Michael and Jennifer Garbett, from Castleford, West Yorkshire, said it made them question why they are living in Cyprus. Mr Garbett, 68, a retired publican, said: “We will be stung. I reckon it could result in lots of people going back home.”
Panic was spreading yesterday as savers queued at cash machines. One customer parked his tractor outside a bank in Limassol in frustration.
Cypriot bank officials said depositors could access all their cash – except the amount due in the levy.
MOSCOW, March 18 (RIA Novosti) – Russian President Vladimir Putin believes the Cypriot government’s plans to impose a one-off levy on all bank deposits as part of a bailout deal to get much-needed loans from international creditors would be “unfair, unprofessional and dangerous,” Kremlin spokesman Dmitry Peskov said Monday.
Putin held a meeting Monday with administration staff and economic aides to discuss economic developments in the eurozone, Peskov said.
“In assessing a possible decision to impose an additional tax on bank deposits in Cyprus, Putin said this decision, if made, would be unfair, unprofessional and dangerous,” Peskov quoted Putin as saying.
The European Union and the IMF agreed on Saturday to bail out Cyprus’ debt-laden economy and grant the island nation a loan worth 10 billion euros ($13 billion) in return for the government’s obligation to tax all deposits kept at Cypriot banks.
Under the terms of the bailout deal, Cyprus will have to impose a levy of 6.75 percent on deposits of less than 100,000 euros and 9.9 percent on deposits with greater amounts. Cypriots reacted with shock and rushed to cash machines to withdraw their savings, but many machines refused to pay out.
Cypriot President Nicos Anastasiades said he had to choose between the “catastrophic scenario of disorderly bankruptcy and the scenario of a painful but controlled management of the crisis.”
The bailout plan has yet to be approved by Cyprus’ parliament, with the vote on the bank deposit levy scheduled for Tuesday.
Russian banks are heavily exposed to Cyprus risk as they had around $12 billion on deposit with Cypriot banks at the end of last year, with Russian corporate deposits accounting for another $19 billion, according to estimates by Moody’s international rating agency.
Russian Prime Minister Dmitry Medvedev echoed Putin’s comments on the Cyprus bailout deal, comparing the proposed tax on bank deposits to “the confiscation of other people’s money.”
“Quite strange and controversial decisions [are] being made by some EU member states. I mean Cyprus. Frankly speaking, this looks like the confiscation of other people’s money,” Medvedev said, speaking at a meeting of the supervisory board of national development bank Vnesheconombank.
He added that Russia may have to reconsider its relationship with Cyprus if the island nation introduces the controversial tax on bank deposits, but did not clarify what specifically he had in mind.
Updated with Medvedev’s comments and Cyprus parliament’s decision to postpone voting until Tuesday.
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Cyprus is in financial turmoil
The Chancellor has moved quickly to ease the fears of Britons
Cypriot President Nicos Anastasiades speaking to the people of Cyprus in a televised address
Russian Ruble, Stocks Nosedive on Cyprus Debt Crisis
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