Can a bank bailout end the Cyrpus crisis?

feature-bank-200bUninsured savings over €100,000 deposited in a troubled Cypriot bank may be subject to a new levy, under a deal reached to save the Cyprus banking system.

The European Union (EU) finance ministers, the International Monetary Fund and Cypriot authorities agreed to the deal to raise €7 billion and qualify for a further €10 billion bailout from the EU and IMF, after a night of intense negotiations in Brussels , the Financial Times reported.

A statement posted on the EU website outlined a plan under which deposits in Cyprus’ second-largest bank, Laiki, would be moved into the Bank of Cyprus.

“Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time,” the statement said.

Cyprus banks will be forced to downsize their assets-to-GDP ratio to the EU average of 3.5 times GDP.

Under the terms of the deal, deposits under €100,000 would be safe but those over €100,000 could be subject to a levy, heavily affecting Russian and other foreign investors attracted to Cyprus’ low-tax environment.

The EU statement did not say how high the levy would be but the BBC has reported the tax could be as much as 40%.

Here are some expert responses to the plan:

Dr Fabrizio Carmignani, Associate Professor, Griffith Business School, Griffith University

From what has been reported, it will be a one-off tax on deposits over €100,000. It’s not the same as having your assets completely frozen, which at some point last night seemed to be the option on the table.

But we are in such a dynamic situation now that things are going to change by the hour as more detail comes out.

There is still the issue that even a tax on deposits can create a precedent for other countries. This might scare uninsured depositors in other EU members in distress.

It’s less of a panic situation than if the bigger deposits were frozen altogether, though. I would prefer to have my deposit taxed in a one-off tax than have my deposits frozen for an uncertain period of time and without knowing how much of them I will eventually be given back.

If they tax deposits at say 20% or 25%, it’s really very high. I don’t think there’s been anything like that in any industrialised economy.

But we are taxing deposits which are not insured so there might be some economic reasons to do that.

Dr Remy Davison, Jean Monnet Chair in Politics and Economics at Monash University

The percentage levied isn’t determined yet.

It looks like the government will likely do this by regulation, rather than via legislation, as parliament passing necessary bills is unpredictable and will take too long.

This levy will not raise the €5+ billion required under the original deposit levy, but will raise €4 billion or so.

There’s certainly very, very little info in the Eurogroup statement. As ever, [it is] behind closed doors and the devil will be in the detail.

This article first appeared on The ConversationThe Conversation.


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