ECB Remains Committed to Cyprus After Bailout is Rejected
On Tuesday, Cyprus’s 56-member parliament voted on and rejected the controversial levy on bank deposits that finance ministers made a condition of the bailout package that was requested by President Nicos Anastasiades over the weekend. Although the results were widely expected — the measure was denied by a landslide 36 against, 19 abstaining, and one absence — it complicates the currency bloc’s efforts to stabilize its economy.
As initially proposed, the levy would charge 6.7 percent against deposits below 100,000 euros ($129,450), and 9.9 percent against deposits greater than that. A revised proposal eliminated charges against deposits of less than 20,000 euros ($25,770), but even if the edited bill was passed the nation would face a funding gap for the 5.8 billion euros ($7.51 billion) that was asked of them. All told, the bailout package was worth 10 billion euros ($13 billion) Anything more than this and finance ministers feared that Cyprus would assume an unstable amount of debt.
The strategy is unconventional, to say the least. It’s important to note that unlike in most other European countries, local banks in Cyprus have a relatively small amount of outstanding bonds. This means that the government is unable to put the burden of the bailout on creditors, and is forced to finance rescue measures through different means. European finance ministers — already burdened with bailouts in four other nations — concocted the tax as a mechanism to take some of the financial weight off their shoulders…
Short of a consortium of eccentric but philanthropically-minded billionaires bailing out the island nation (crazier things have happened), Cyprus doesn’t have many options on the table. The country has an economy of about 18 billion euros ($23.5 billion), and unemployment of about 14 percent. Depositors may be elated that their savings weren’t Shanghaied, but the nation is still staring crisis in the face.
“In the very short term, this will be a small victory for the more rational observers who had looked at this move as, frankly, outrageous. But it leaves Pandora’s Box wide open,” Mike Moran, senior currency strategist at Standard Chartered in New York, told Bloomberg.
On Thursday, banks will reopen for the first time since closing over the weekend. Analysts and observers have expressed concern about a bank run. In the meantime, the ECB said that it “reaffirms its commitment to provide liquidity as needed within the existing rules.”
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