WASHINGTON, March 25, 2013 ― Cyprus has been a safe harbor for foreign depositors’ cash and bonds. Not any more.
In a deal reached in the wee hours of Monday morning (March 25), the European Union dealmakers agreed to bail out Cyprus’s banking system, forcing losses – but, they are quick to say, not taxes – onto the depositors and especially bondholders.
The EU will loan select Cyprus banks some ten billion euros under the deal, which was designed to keep locals from devolving into a hard-to-control, hard-to-monitor and hard-to-tax cash-based economy.
For weeks, locals have had increasingly less success as they tried to withdraw funds. ATMs typically limited withdrawals to 400 euros; this was cut, and cut again. The New York Times notes that by Sunday night, the limit was 100. Fueling this demand for cash is a distrust of the banks; merchants have been getting tougher on credit-card purchases; checks are likewise not welcomed.
Withdrawals of even local money would draw down the reserves below the levels set by the bank charters in the Euro Zone. Apparently, fractional reserve banking in Cyprus has extended beyond its means to catch up. The system is closed on Sundays, but reserve requirements need to be met by close of business on Monday.
The banks, known also as havens for big-bucks foreign money, took a hit when the Greek economy collapsed last summer; their (Greek-bond) reserves were depleted, further stressing bank solvency. Cash withdrawals made things worse; but with rumors of bank collapse, people wanted their money, not IOUs – especially IOUs from technically-bankrupt banks.
The midnight deal, forged in Brussels, seems to indicate that local giant Laiki Bank will soon cease to exist, its business largely to be taken over by the biggest bank, the Bank of Cyprus, which will get the big share of the bailout money.
Last week, a plan was floated to simply tax away large portions of deposits over 100,000 euros; the outcry was heard across all the Euro Zone’s banking and political centers, and the language was scrapped. The new plan calls for these deposits to be trimmed, rather than taxed.
Reports don’t seem to indicate what that means, but it’s somehow more-acceptable to the heads of the central banking cartel, who are approving the deal and the loan.
Cyprus has tried over the past decade or so to emulate London, in having a banking sector with assets that are far out of proportion to its population or indigenous wealth. Though the model has been stable in London, Cyprus does not have the critical mass necessary to write its own rules; the rules-givers on the Continent have reacted predictably to what they see as the profligate upstart.
Cyprus’s Parliament on March 16 soundly rejected an earlier bailout deal. This deal’s basic plan was approved on Friday; the rulers all around say that the Parliament’s approval of this specific plan will not require an actual vote of the Cyprus Parliament. It has been worked out by the bankers; the deadline was Monday night; there is no more time for Parliament to decide – and they have no choice, if they want the Bank of Cyprus to remain “solvent,” but greatly in debt to the international money groups – the European Central Bank and the International Monetary Fund.
The idea of a bank default was apparently never permitted to be an option. There will be no “market-clearing” allowed, this time.
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