Cyprus bailout sparks new round of economic turmoil in Europe
Foreign Policy – With the decision to require Cypriot depositors to pay for a bailout of the country’s ailing banking sector, European regulators may have set off a new phase in the eurozone crisis as outrage mounted over the weekend against the plan and some analysts warned that a run on Cyprus’ banks may spread to Italy and Spain. In Cyprus, political support for the 1 billion euro bailout package is now crumbling. The Cypriot parliament has delayed a key vote to approve the measure after people flocked to ATMs over the weekend to remove cash from their accounts before the tax was implemented.
Under the terms of the current deal, accounts with under 100,000 euros would be taxed at a rate of 6.75 percent and accounts over 100,000 at a rate of 9.9 percent. Cyprus’ president, Nicos Anastasiades, tried to to sell his country on the deal, which was largely forced on him by European financial mandarins, in an address to the nation, arguing that without the deal the country’s financial system would completely collapse, the economy would be crippled, and the country would likely exit the eurozone.
Under previous bailouts, bond holders have been forced to take losses on their holdings in order to finance loan packages, but individual depositors have so far been exempt from having their savings raided to bail out banks. The reversal of that policy has led to fears that depositors in Spain and Italy may move quickly to remove their savings from banks, a move that would devastate those countries’ financial systems. The new policy is the result of two main factors: Germany’s unwillingness to finance further bailouts out of its own pocket and the presence in the Cypriot banking system of large deposits held by Russians, who have taken advantage of the country’s lax banking rules to park their money there. Russian President Vladimir Putin slammed the measure, calling it ” “unfair, unprofessional and dangerous.”
Anastasiades is now attempting to renogotiate the terms fo the deal to shift the rate at which deposits would be taxed to more heavily affect larger deposits, a move that would place the burden more heavily on the large foreign deposits which currently reside in Cypriot banks.
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