Cyprus Bailout Package Reaches into Private Bank Accounts

Michael Teague |

Aside from being the presumed birthplace of Aphrodite and Adonis, as well as the location of a number of important events in ancient Greek mythology and history, the Mediterranean island of Cyprus counts for less than half of one percent of the European Union economy.

While the politically divided island-nation is not frequently spoken of in the same breath as other faltering European economies such as Italy, Greece, Spain, Ireland and Portugal, its banking sector is in a great heap of trouble, perhaps even more so than its colleagues. And thus, like their colleagues, Cypriot banks have turned to the European Central Bank to bail them out.

All of the troubled Eurozone economies have had to accept painful austerity conditions in order to qualify for these bailouts.  The Greek government in particular has had to drag its citizens, on either end of the increasingly polarized political spectrum, kicking and screaming through this process.  In Spain there have been mass protests as well as separatist demonstrations in the southern Catalan region, while Italy has seen political gridlock and instability as a result of harsh austerity programs.

Cyprus differs in one important way: the Eurozone has decided that the terms of its $13 billion bailout package should include the seizure of a percentage of all private bank accounts, 6.75 percent for those under 100,000 Euros and 10 percent for those above that amount.

The news had the global economy jittering on Monday.  The Euro fell to a three-month low, Asian markets were uneasy, and in the United States, both the DJIA and the S&P 500 were down as well.

That the effects have not been worse is no doubt a good thing.  But the timing of this news must be considered: Monday is a national holiday in Cyprus, so no immediate run on the banks is possible, but the shock and outrage both on the island and worldwide has forced the government there to postpone implementation for a few days to retool the terms of the deal.  What seems likely is that larger accounts will be taxed a higher percentage while smaller accounts a lower one.

Cyprus is seen as a haven for all sorts of unsavory money, especially that of wealthy Russians.  It also has the misfortune of being to some extent at the mercy of its diminutive size and geographical position, surrounded as it is by a number of political fault lines from its own internal one between Turkey and Greece, who have gone to war in the past over the territory, but also in a broader sense, given its proximity to the increasingly volatile Levantine coast (it has been a refuge for those escaping various conflicts in that area over the years).

The news of the onerous bailout terms adds a new dimension to the islands powerlessness against the larger forces surrounding it, however.  The difference this time, however, is that the implications could backfire.  Domestically, this means a run on the banks and what could potentially be worse, the kind of social unrest that is invariably exacerbated by previously unresolved issues (i.e.-the conflict between Turkish and Greek Cypriots).

In the immediate neighborhood, ailing E.U. economies are likely wondering what future bailouts might hold in store for them.  The Eurozone has already been an extremely soft spot for the global economy, and any more serious trouble could very well cause panic and unintended consequences.

In a larger sense than that even, this sort of heavy-handedness on the part of the bigger and, by comparison, healthier E.U. countries who have outlined this bailout package symbolically undermines one of the most fundamental guarantees of any economy, that of the safety of private bank deposits.

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