Cyprus: Confusion Reigns

Econintersect: Cyprus has extended Monday’s bank holiday for two more days.  As things stand at the moment, banks in that country are scheduled to open on Thursday.  In the early morning hours in Nicosia on Tuesday (19 March 2013) there is little to encourage one to think that the banks will actually open on Thursday.  Many of the specifics announced by the Eurozone finance ministers on Saturday now appear to be unraveling.  It appears that the Cypriot parliament vote on the bailout, originally scheduled for Sunday, then rescheduled to Monday and then rescheduled again to Tuesday is not likely until later in the week.

The banks are not going to open until the Cyprus government votes on a bailout package.  And what seemed to be the package just 24 hours ago now is in disarray indicating that a vote in the near future is not likely.  Every major element outlined over the weekend is in doubt.

Here is an assessment from the Financial Times:

A senior EU official said international lenders were pushing the Cypriot government to exempt all deposit holders below €100,000. Instead, the IMF, the EU and the European Central Bank wanted a levy of 15.6 per cent on all deposits above that level, many of which are held by Russians.

The proposed levies over the weekend were 6.75% on accounts up to €100,000 and 9.9% above that amount.  At that time European Commission officials indicated that an easing of terms on a Russian €2.5 billion loan to Cyprus was part of the debt bailout package.  The FT indicates that the proposal for higher assessments on the on the large accounts could quash that deal.

In spite of what the FT excerpt said (above), it is reported (also by the FT)  that Cyprus President Nicos Anastasiadeshas proposed that a 3% “tax” be imposed on accounts under €100,000, 10% from €100,000 to €500,000 and 15% above €500,000.

The running diary kept by The Guardian‘s Graeme Weardon on Monday (first source item below) documents just how little was accomplished during the day.

Editorial comment: If there is no further clarity emerging in the next 24 hours Econintersect suggests the banks in Cyprus will remain closed at least until next week.  This is a difficult scenario to play out because it is changing the order a assumed risk for investment.  If this plan goes through as being discussed it means that the idea that imsured bank deposits are less risky than bonds will be proven false.

How will the world change when money in the form of bond is less risky than cash?  The exchange value of such currencies will necessarily suffer.  If the result of this event is that the Euro becomes viewed as a risky currency to hold relative to the yuan, U.S. dollar and the yen (and other sovereign currencies), how far will it fall against the rest of the world’s currencies?

John Lounsbury

Sources:

• Cyprus races to rework savings tax after closing banks till Thursday – as it happened (Graeme Weardon, The Guardian, 18 March 2013)

• Cyprus scrambles to renegotiate bailout (Kerin Hope, Peter Spiegel and Charles Clover, Financial Times, 18 March 2013)

• GEI News articles about Cyprus