Bank of Cyprus

Cyprus rescue gone badFrankfurter Allgemeine has:

  • Cyprus needs the Credit package to finance their domestic banks. The banks were hard hit by the debt restructuring in Greece last year. The Cypriot bank balances are 8 times the GDP where the EU average is 3½. The Cypriot Banks are now being forced to slim down.

  • Cyprus introduces a onetime tax of 9.9% on deposits of more than 100,000 EUR smaller sums pay 6.75%; but will in exchange become part owners of the banks.
  • Cyprus has encouraged investors with the lowest corporate tax in the EU (10%) that will now be raised to 12½%. That should bring in .2 bio. EUR annually.
  • A tax on interest is planned. The interest carrying deposits are around 70 bio. EUR, somewhat more than half are foreign mainly British and Russian.
  • Cyprus could be encouraged to bring the state phone company, power supply and harbours into private ownership.
  • Russia will probably also help Cyprus in as much as they will extend the already paid loan.

Comments from ‘Northern European perspective’:

1) If Russian tax evaders think Germany is going to pay their speculative investments, they have another thing coming.

2) The surprising thing is that the small depositors are hit as well. In this context it is well to remember that the interest rate on Greek sovereign bonds soared to 7% – which of course must have been why the Cypriot banks have offered an interesting deposit rate at the time. There is a strange justice there – or rather a well prepared one. Why should Cypriot depositors benefit when depositors all over Europe go into 0%.

3) The idea that depositors become shareholders and absorb losses is very much an EU principle, as can be seen in the Danish proposal to manage crisis in Systemic Important Financial Institutions (SIFI’s):

4)  It does point towards the problems with large banks in a small country.  We’ve seen Iceland where things ended badly – and not at all to the satisfaction of the bank – in England. Which one is the next on the chopping block: Lichtenstein, Luxembourg – or Switzerland?

In this context the Tobin-tax of the EU should be seen, not due to revenue, but because it will trace not only European trade; but the provenance of the securities. It might be a tad difficult to get Bundesbank to pay out a sovereign bond at maturity – if you can’t prove you have paid tax.

Will a Tobin-tax scare off investors and depositors form Europe? In the Cypriot context: Hopefully.