The recent news that Cyprus would be taxing 10% of every savings account in domestic banks has sparked major backlash, as well as a negative ripple effect through the global markets. But there's more than an unprecedented tax that makes the Cyprus situation unique. And it's worth taking a look at just why this tax is being placed on the people of Cyprus.
So, like many other small EU nations, Cyprus took advantage of the protection and stability of the Eurozone to borrow large amounts of money, driving themselves into debt. Like other countries that have done this (Greece is the best example), Cyprus was abruptly cut off when the recession hit back in 2007/08.
The thing that sets Cyprus apart is its banking system. First of all, the banks can make almost no money on bonds, so they focus a lot more on savings. Because of that, the Cyprus banks have very loose regulations to help attract big investors. This has led Cyprus to become a major tax haven for foreign Oligarchs, specifically Russians. Many wealthy Russians use the Cyprus banking system to keep their savings free from higher domestic taxes. The EU struggles with banking because different nations have different laws and regulations, creating pockets where investment and savings grow while others shrink. The Cyprus banks used all that foreign money to invest and keep themselves afloat, at least until the crisis.
Now, Cyprus is asking for a bailout for its banks. In other nations, the EU (really, Germany, but it's essentially the same thing) has demanded steep austerity measures to offset the influx of cash to bail out the government. But it's not just the governments that are asking for bailouts, its the banks. In Cyprus, the banks are demanding a bailout from the Cyprus government who, in turn, is asking for the money from their creditors.
The problem, though, is that the EU is not about to bail out a bunch of wealthy foreigners, especially not Russians. They are loathe to pour European Union money into a banking system that is used by wealthy non-EU tax cheats. So, the creditors gave Cyprus the ultimatum: charge the savings accounts to help with the bailout cost, or say goodbye to the Eurozone.
It's an interesting calamity. Cyprus is a relatively small country, like Greece, and both have been threatened with EU ostracization. Both have relatively small economies, and both have borrowed huge sums of money to help improve and maintain a high standard of living for their citizens. But Cyprus has been given what appears to be a no-win situation. Either they steal 10% of their citizens' money, or they are kicked out of the Eurozone. You can imagine why Cyprus faced a near-run on the banks, stopped only when the government ordered all the banks closed until Thursday, likely when the 10% tax will be incurred.
But wait, there are some limits on that tax. For one thing, it won't touch anyone with less than $100K. Second, it's worth noting what the alternative appears to be: the end of the Euro in Cyprus. What will everyone's money be worth when it has to be converted into domestic currency? Not only that, forget about Eurozone trade, Eurozone politics and "borderless" diplomacy, easy Eurozone protection and support, and so on.
Like I said, the EU has essentially put Cyprus in a situation they cannot possibly work out without serious damage to their credibility, economy, or both. The EU, and especially Germany, has got to stop demanding blood sacrfices for every penny they kick to these developing nations. Places like Greece and Cyprus can't keep up with the rest of the Eurozone economy, so they have to borrow. Then, the big banks in Germany and the other lending nations call in these debts, and demand austerity for them. Those small countries don't have much of a budget to slash, so every little bit hurts. This leads to layoffs, depressed economies, and more borrowing to keep things running, which demands more austerity to keep the cycle going.
I'm not saying the major powers of the European Union should just give away this money, and I can understand their reluctance to bail out the Cyprus banks. But they have to see now that austerity helps no one and hurts everyone, and that continuing to hold small countries to impossible standards, to the point of forcing complete chaos in their economy and banking system (not to mention global implications) is unwise, unfair, unjustified, and downright stupid. If they expect to get their money back from a country that has to steal the wealth of its citizens (by their own direction, mind you), and demanding spending cuts, they have no concept of basic economics and investment returns. That money has to be put to use, it can't be shackled to austerity cuts.
So, that's basically the Cyprus story. It will be interesting to see how this plays out, and how the rest of the Eurozone responds to whatever Cyprus ends up doing. Seeing as how they've closed their banks until later in the week, they seem to be leaning toward tax. Or, they are attempting to prevent a run and buy themselves enough time to fashion a new deal with their lenders. I wish them well. Any deal would be better than what they've been handed now.
By the way, the reason there aren't more links in this is because so few new agencies are reporting on it, at least beyond the fact that it is happening. Let's hope this gets more attention.