Saving the day
March 23, 2013
It was a proposal that prompted outrage in Cyprus: Cypriots were supposed to make a contribution to help bail out their country's banks in the form of a levy on their bank savings. Outrage ensued and the proposal was withdrawn. Savings under 100,000 euros ($130,000) would remain untouched; anything over that would require a compulsory contribution.
The Cypriot Parliament rejected that plan on Tuesday (19.03.2013), and not even the ruling parties' parliamentarians voted for the proposal, choosing instead to abstain. But the parliament's rejection did not come as a surprise to some experts.
"We've have grown accustomed to overreaction and emotional responses to crisis situations rather than handling them calmly and coolly," said Josef Janning of the German Council on Foreign Relations (DGAP).
Too much or too little pressure
Janning said depositors' contributions to the bailout were necessary and that the proposal was not presented well to the public. After all, "it was an attempt to protect the interests of many small and mid-range asset holders in Cyprus. Politicians could have been a lot more proactive in communicating that to the public," he said.
The alternative is bankruptcy for the Cypriot banks, "and that would mean that anything beyond deposit insurance would be completely lost," Janning said in an interview with German public broadcaster Deutschlandfunk.
Sven Giegold, a German Green party member in the European Parliament, said negotiations between the eurozone finance ministers and the Cypriot government did not go well. He told Deutschlandfunk that a great deal of pressure had been placed on Cypriot President Nicos Anastasiades - particularly by the European Central Bank's threat to put the brakes on Cyprus' emergency aid. "Those sorts of methods don't exactly make it easier for everyone to get along," he said.
Giegold also admitted that, for its part, Cyprus had not put much effort into its attempts to combat money laundering or to raise taxes.
But the more serious issue, he said, was that private depositors and investors were called on to play a role in the bailout. Five years ago, he said EU finance ministers had guaranteed that deposits from small-scale savers would be protected in the European Union. "Breaking this European promise was a major mistake"
'A contribution is necessary'
Giegold and Janning were not the only ones to say that when it comes to Cyprus, it would be fundamentally correct to impose taxes on bank deposits. Since it is a bank crisis, one should be permitted to ask "what contribution those who have used this haven" could provide, said Markus Ferber, a European parliamentarian for Germany's Christian Social Union.
Janning added that a contribution on the part of Cypriots was necessary because the amount required for a bank bailout would be as great as Cyprus' gross national product. Financing a bailout solely through loans would push up the country's level of debt so high, that "it would be far beyond those of the other crisis nations," he said.
'Solidarity fund' rather than a compulsory contribution
No matter which way the bailout will be financed, Cypriots want their banks to re-open. Banks have been closed this week out of fear of a customer onslaught.
A "solidarity fund" agreed on Friday evening by the Cypriot parliament could pave the way for that. The country must drum up 5.8 billion euros ($7.5 billion) in order to receive the 10-billion-euro EU bailout package.
According to the plan by Cyprus' leading politicians, money from pension funds and the Church are to be bundled together in the "solidarity fund" and then sold as emergency loans to finance the state. The Cypriot Central Bank would also be called on to contribute part of its gold reserves to the fund.
Shortly after plans for the fund were announced, doubts were raised in Germany and elsewhere.
Fight the tax havens
Joachim Poss, deputy parliamentary party leader for Germany's liberal SPD, said Cyprus - by rejecting a levy on bank savings - was more concerned with protecting the wealthy and maintaining its image as a tax haven than in protecting depositors.
"And when we talk about Cyprus, then we also have to take a look at Luxembourg, the Netherlands, and other countries that play a dirty game when it comes to the tax evasion strategy, which we have to put a stop to," he said.
Janning of the German Council on Foreign Relations estimated that change will be in store for other EU countries considered as tax havens.
"After Cyprus, it will generally become more difficult to maintain such dramatically advantageous conditions," he said, adding even Russian oligarchs may reconsider whether Cyprus is really the best place for their investments.