Cyprus has been ridden with political conflict for so many decades, one could be easily confused just trying to figure out whether or not Cyprus is an autonomous state. Instead of political conflict, Cyprus’ most recent conflict is economic and involves their banks failing. A Wall Street Journal article entitled, “Cyprus Risks Euro-Zone With New Levy Plan” describes a new proposal, which differs from traditional bailouts quite substantially. Instead of the traditional bailout mechanisms used by the EU, a bill was drafted and sent to Parliament that would tax deposits to Cypriot Banks. The banks have been closed for fear of a bank run and do not expect to open today or tomorrow.
The bank deposit tax was rejected today (Tuesday the 19th), however, and in an article by the New York Times, entitled “Cyprus Rejects Deposit Tax, Scuttling Bailout” cites that the bailout was not put through partially because of criticism that such a measure was unprecedented and could cause further failure of the banking system. Criticism was notably vocal from the Russian government. Another reason cited by this article for why the bailout didn’t go through was that ordinary depositors with insured accounts would have to take on the cost of the deposit tax. There is danger in this because it causes a loss of faith in the banking system when they seemingly start to make up rules.
This led me to question: how is it that such a relatively small country in the Mediterranean have a large enough deposit pool to make taxation on the deposits almost equivalent to the 5.8 billion Euro bailout Cyprus is searching for? (The deposit tax is projected to leave them a couple hundred million Euro short). It turns out, according to an article by The Guardian entitled, “The Super Rich Who Have Made Cyprus Their Home” has been giving out citizenship relatively easily and drawn the worlds wealthy to be citizens of Cyprus because the taxes there are much smaller than many other nations. “Some of the super wealthy are expected to have to deposit 17 million Euro of their private fortunes due to the new tax provisions”. I am sure they are breathing a heavy sigh of relief that this bill did not go through, but it doesn’t mean that Cyprus is out of the woods. Anything but; they now have no solution and no open banks. In the New York Times article cited above they note that President Anastasiades, the EU and the IMF will have to turn back to negotiations and quickly, as reopening banks without a solution would be a tough blow for Cyprus. The question remains, what kind of solution will best suit Cyprus? And who should be making this decision, Cyprus, the EU or the IMF? Is it possible for 3 actors with differing and competing interests to come up with a solution?
This situation is Cyprus is very interesting. On the one hand you have extremely rich investors that want to make Cyprus the home for their millions and on the other you have failing banks. If the tax bill had passed, I think that many of those investors would have withdrawn as quickly as possible. Just as we talked about in class, investors do not like any type of capital control on their investment. This would have decreased investment into Cyprus and may have led to many fallout consequences. They will still have to explain to investors how the banks failed and regain their trust, but hopefully they can avoid a serious run on the banks.
ReplyDeleteI believe that a long run solution for Cyprus would be for a fiscal policy that would eliminate the taxation of cash flowing in or out of the country, in that way there would be incentives for people to send money to private banks in Cyprus. I say that because it is a policy that is in the Bahamas and in Switzerland and it seems to be a stable and safe decision of the government.
ReplyDeleteThis is a very interesting situation. It has been a while since something like this has happened. Much of the money the Cyprus has now comes from the wealthy individuals, if the bill would have gone though it would have lost most of its revenues, because the wealthy would have left. Cyprus need to work quickly to figure out a solution for the bank failures. If the banks do not reopen soon then, because they are known to have such large amounts of political unrest, they may have a revolt on the government.
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