Cyprus Bailout Dependent on Depositor Levy

The government of Cyprus is set to get assistance from the International Monetary Fund and the World Bank to the tune of ten billion euros. Unfortunately, the Cyprus bailout will have a precondition of the monetary infusion, which is a levy worth 6.75% or 10% of the bank deposit for each bank depositor, depending on the amount of money they have in the bank. Cyprus President Nicos Anastasiades, however, vowed that he would fight these pre-conditions.

Imposition of Bank Levy

The measures are unpopular. Cypriot depositors don’t like it. Large foreign depositors also don’t like it. The Cyprus government is in a bind about it. Germany is getting all sorts of flak about the proposal. The Cyprus Parliament will be voting whether or not to accept the terms of the monetary infusion which can help prop up and save the country’s financial system. Or they can reject the German-led proposal which will probably lead to a collapse of the banking system and eventual exit from their participation in the European Union’s currency zone.

As part of the terms, depositors in Cyprus banks will be levied 6.5% of their deposits if they have less than 100,000 euros in the banks. For deposits greater than 10,000 euros, they will be levied 10%. The total bank assets is estimated at 8 times the gross domestic product (GDP). The effect of this will be to lessen the country’s foreign debt by around 100% of the GDP. In contrast, Greece’s foreign debt is at 160% of the GDP. For another, in terms of its effect on Europe, it would not make much of a dent, as Cyprus accounts for only 0.2% of the Eurozone.

In exchange for paying the levy, depositors will be compensated with shares of stocks in their banks. In addition, Anastasiades promised that depositors who kept their money in the banks for the next two years would be rewarded with bonds directly linked to earnings from a new gas field. In 2011, Cyprus announced the discovery of a huge gas field in the Mediterranean with an estimated volume of 5 to 8 trillion cubic feet. At this time, Turkey is disputing the field.

Fallout in Other Countries

The fears of European politicians and economists is that this type of condition could be used with the economies of Italy and Spain. For another, this is almost like a circumvention of deposit insurance. It has been described as a bail-in and as a forced relinquishment of personal cash to the government almost like the concept of eminent domain.

Cyprus has called for a bank holiday on Tuesday, and on the same day, the Parliament would be voting on the measures. There are 56 seats on the Parliament, 20 of them are members of the President’s party. It is expected that the Parliament would vote in favor of the measure, by a narrow margin of 30 to 26. It is not clear whether or not President Anastasiades will negotiate with German Authorities for better terms of the loan.

In Cyprus, a bank holiday was imposed by the Government in anticipation of a possible bank run. Wire transfers have also been prohibited. Although, for the convenience of the citizens, automated teller machines have been kept running during the bank holiday.