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Cyprus Rejects ECB Bailout Conditions

eurozone

Much like Greece, Cyprus has been in the middle of an economic crisis lately due largely to the fact that it’s national budget is far higher than it can afford to pay and the interest rates on its bonds has skyrockted in recent weeks. Like Greece, Cyprus went to the European Central Bank for assistance, and in response were met with what have to qualify as some of the most egregious conditions ever seen. Essentially, the ECB is demanding that the government of Cyprus confiscate money from its citizens. This resulted in bank runs over the weekend as Cypriots, quite naturally, rushed to protect their savings. Today, though, the Cypriot Parliament rejected the deal:

(Reuters) – Cyprus’s parliament overwhelmingly rejected a proposed levy on savings in banks as a condition for a European bailout on Tuesday, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.

The vote in the tiny legislature was a stunning setback for the 17-nation bloc; lawmakers in Greece, Portugal, Ireland, Spain and Italy have all accepted unpopular austerity measures over the last three years to secure European aid.

With hundreds of demonstrators facing riot police outside parliament and chanting “They’re drinking our blood”, the ruling party abstained and 36 other lawmakers voted unanimously to reject the bill, bringing the Mediterranean island, one of the smallest European states, to the brink of financial meltdown.

EU countries said before the vote that they would withhold 10 billion euros ($12.9 billion) in bailout loans unless depositors in Cyprus, including small savers, shared the cost of the rescue; the European Central Bank had threatened to end emergency lending assistance for teetering Cypriot banks, which were hard hit by the financial crisis in neighboring Greece.

The demonstrators were unbowed: “This is a great decision for Cyprus,” said Andreas Miltiadou, a 65-year-old pensioner among the crowd. “The voice of the people was heard.”

The ECB said it “took note” of the vote and remained “committed to provide liquidity as needed within the existing rules”.

Cyprus still has fiscal problems to deal with, of course, but I’m actually glad they stood up to the ECB on this. If they had succeeded in shoving this down the throats of the Cypriots, then they clearly would have tried it elsewhere. More importantly, I would expect that it would have resulted in instability in the banking systems of a number of European countries who area already on the brink of crisis as citizens wondered if their bank account would be the next one that the ECB might want to steal from.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Tsar Nicholas says:

    Good blog post.

    Morals of the story:

    1. Spending more than you take in over the long haul never works out, and has catastrophic real world consequences.

    2. Owing money is a bitch. Owing more money than you ever could pay back is a bitch on steroids. When the debtor in said circumstances is a nation then her citizens will suffer, one way or the other.

    3. Leftism as public policy is a de facto national suicide pact. Fiscally. Economically. Hell, in every context. The irony of course entirely would be lost on U.S. liberals.

    Like or Dislike: Thumb up 2 Thumb down 15

  2. grumpy realist says:

    What about if the ECB says: ok, we’ll provide you with enough $$ to cover the deposits up to $10K (or whatever it is the banks originally promised), the rest will live or die as the banks live or die?

    I don’t see why the ECB should have to bail out banks of a tax haven providing financial services for the Russian mafia. If the Russians were stupid enough to put their money into banks buying up nothing but Greek sovereign bonds, then let them take the haircut.

    Like or Dislike: Thumb up 3 Thumb down 0

  3. grumpy realist says:

    @Tsar Nicholas: It doesn’t look like leftism or rightism has anything to do with whether the banks of a country need to get bailed out or not. It has more to do with how strict countries were with their banks.

    I suggest Cyprus do what Iceland did with its banks: fiat justicia, ruat coelum.

    Like or Dislike: Thumb up 9 Thumb down 0

  4. Neil Hudelson says:

    @grumpy realist:

    Only because you don’t understand Nicky’s definition of leftism: “whatever I don’t like or don’t understand.”

    Considering his astonishingly tiny intellectual capacity, it’s usually the latter.

    Like or Dislike: Thumb up 6 Thumb down 0

  5. legion says:

    @grumpy realist:

    I don’t see why the ECB should have to bail out banks of a tax haven providing financial services for the Russian mafia.

    Because it’s what a “central bank” is supposed to do. Unfortunately, the ECB has repeatedly refused to act anything like its name. This is further complicated by the fact the Cyprus _is_ a foreign tax haven that the Euro Zone should have dealt with long ago – as a condition for Cyprus being admitted, preferably. But they didn’t. And now they’re stuck cleaning up the mess.

    If the Russians were stupid enough to put their money into banks buying up nothing but Greek sovereign bonds, then let them take the haircut.

    Agreed. The problem is that this is explicitly _not_ just haircutting the foreign depositors, even though that seems like something that would be easy to segregate. This was going to “tax” 10% off every account, foreign and domestic, to rebuild banks that made crappy decisions. If they hadn’t denied the proprsal, I don’t think it’s an exaggeration to say that it would have, quite literally, ended public banking in the EU.

    Like or Dislike: Thumb up 0 Thumb down 0

  6. Moosebreath says:

    Doug,

    “Essentially, the ECB is demanding that the government of Cyprus confiscate money from its citizens.”

    And this is different from what the ECB demanded of Greece in the form of higher taxes and reducing pensions and retirement benefits promised for decades because…?

    Like or Dislike: Thumb up 1 Thumb down 0

  7. Moosebreath says:

    @Moosebreath:

    Or to put it another way, you seem to be saying that when the ECB demands cuts to promised benefits to the poor, that’s austerity. When it demands a tax on the rich, that’s confiscation.

    Like or Dislike: Thumb up 5 Thumb down 0

  8. Jeremy says:

    They should make the banks’ shareholders and the bondholders eat it. No more bailouts. Only if wiping out the shareholders and the bondholders doesn’t cover the debt (which, IIRC, they do), then you can move on to depositors. But that is always a extreme, Double Red Alert, All Hands Abandon Ship, last resort.

    Like or Dislike: Thumb up 3 Thumb down 0

  9. Mike says:

    @Tsar Nicholas: Just curious what do you think G. W. Bush was? He spent money like a drunken sailor – was he really a liberal who ran on the Republican ticket?

    Like or Dislike: Thumb up 3 Thumb down 0

  10. MBunge says:

    @Tsar Nicholas: “1. Spending more than you take in over the long haul never works out, and has catastrophic real world consequences.”

    Am I supposed to believe that folks like the Tsar really think the current problems in Europe are because of their tax and spending policies? They may not have helped anything, but the fundamental cause of the Euro crisis has essentially nothing to do with government spending or taxation.

    It would be one thing if conservatives were just taking advantage of the situation to advance their agenda. You can deal with a bullshitter. You can’t really deal with someone that believes their own bullshit.

    Mike

    Like or Dislike: Thumb up 3 Thumb down 0

  11. Lakis Velotris says:

    Yet another Unbridled Trojan Horse. The Greek Church begat Islam and COmmunism by rejecting Original Sin. Time for Greeks to fly off to another planet.

    Like or Dislike: Thumb up 0 Thumb down 0

  12. Gromitt Gunn says:

    @Moosebreath: Do you understand that the ECB’s proposal would have superceded Cypriot Deposit Insurance statute, and would have confiscated 10% of bank deposits across the board? If you do, please explain how losing 10% out of checking and savings accounts for the average working class family is anything less than devastating?

    This would be the equivalent of the NY Fed deciding to ignore FDIC / NCUA deposit insurance guarantees and seizing 10% of everyone’s checking and savings accounts across the country. It would be disastrous to lower and middle class people and destroy the faith in the the deposit insurance schema that has prevented bank runs in this country for about 80 years.

    Like or Dislike: Thumb up 5 Thumb down 0

  13. Dave Schuler says:

    @Gromitt Gunn:

    The “average working class” Cypriot family has 100,000 euro on deposit? Who knew?

    My guess is that actual average working class Cypriot families don’t have bank deposits at all. Or not much, anyway. The 10% is targeted at Russian oligarchs.

    Like or Dislike: Thumb up 0 Thumb down 0

  14. Moosebreath says:

    @Gromitt Gunn:

    In response, do you understand that the austerity measures required in order for Greece to receive a bailout included cuts in pensions in the range of 20% (adding up the cuts here?

    Please explain how losing pension income for the remainder of a pensioner’s life is less devastating than a one-time loss of a smaller percentage of savings.

    Or is it only class warfare when the upper classes lose out?

    Like or Dislike: Thumb up 0 Thumb down 0

  15. Rob in CT says:

    Dave, I don’t think he was talking about 100,000 Euro + accounts. I think he was talking about sub-100k accounts.

    Wasn’t the original proposal a “tax” on *ALL* deposits, no matter how small? Then I heard about a revised proposal that taxed anything over 20k (which, to me, was a much more reasonable proposal). That’s the proposal that failed, right?

    Like or Dislike: Thumb up 2 Thumb down 0

  16. Gromitt Gunn says:

    @Dave Schuler: No, Dave, you’re completely misreading me.

    What I am saying is that if I have $2000 in the bank to pay my rent and bills for the month, and the government seizes $200 of that, suddenly I have to choose between my mortgage, my car payment, and food. Whereas if someone with $500,000 in the bank loses 10%, they still have $450,000.

    Banking systems require stability to function properly and part of that is the acknowledgment that, up to a specific threshold, your demand deposits will be there when you need them, in full.

    Like or Dislike: Thumb up 3 Thumb down 0

  17. Gromitt Gunn says:

    @Moosebreath: Oh, please. If the banking system loses credibility, it hurts the average Cypriot (and sets a precedent within the Eurozone that it can then happen in Spain, Italy, etc.) much much more than its hurts the offshore Russian mobster.

    The offshore investors can just move their money to Aruba or the Caymans or Switzerland or whatever other haven jurisdiction comes into favor (and there will always be one willing to pick up the slack in order to boost its coffers – *always*). Where is the average Cypriot going to take their money when their national banking system gets destabilized due to a breaking of the social contract re: guaranteed deposits? And if the ECB were to prove able to force Cypress to break its deposit guarantee system, why wouldn’t they do it another country?

    We really don’t want to see what would happen if the working and middle classes in the PIGS (or anywhere) decided to run on their banks. The social instablity from pension reduction would be a joke in comparison

    Like or Dislike: Thumb up 1 Thumb down 0

  18. Moosebreath says:

    @Gromitt Gunn:

    “If the banking system loses credibility, it hurts the average Cypriot (and sets a precedent within the Eurozone that it can then happen in Spain, Italy, etc.) much much more than its hurts the offshore Russian mobster.”

    Perhaps, though I was certainly not talking about the Russian mobsters. On the other hand, I find it fascinating that you think a a pensioner with a $5,000/year pension and $2,000 in the bank is more affected by losing $200 at once than $1,000 per year in perpetuity.

    Like or Dislike: Thumb up 0 Thumb down 0

  19. Gromitt Gunn says:

    @Moosebreath: The only way you think that is by deliberately misinterpreting my comments. Maybe you should have picked this quote:

    We really don’t want to see what would happen if the working and middle classes in the PIGS (or anywhere) decided to run on their banks. The social instablity from pension reduction would be a joke in comparison

    instead.

    No T, no shade, hunty – I truly am sorry that you’re in the same boat as the majority of the population that don’t understand the contagion implications of a bank run on the overall economy and social stability.

    Like or Dislike: Thumb up 0 Thumb down 0

  20. Moosebreath says:

    @Gromitt Gunn:

    Sorry, but I understand you perfectly. You are saying that the effects of a bank run (which largely hits the people with large amounts of savings) is far worse on the lower and middle classes than the effects of cutting the pensions of those people. Or as I indicated, you think “a pensioner with a $5,000/year pension and $2,000 in the bank is more affected by losing $200 at once than $1,000 per year in perpetuity.” I just don’t agree with you.

    I think the social stability will be far worse if the majority of the population which relies on the pensions (and which it sacrificed past and present earnings for the promise to be paid them in the future) has them cut, both because of the people whose pensions are the only income keeping them from a retirement of poverty and starvation will by itself create social instability, and because reneging on the promise to pay people what they’ve relied upon hurts social fabric tremendously.

    Like or Dislike: Thumb up 0 Thumb down 0

  21. Console says:

    Let’s not get the cause and effect mixed up. Insomuch as Cyprus has a economic crisis, it’s because of its banking sector. Insomuch as it has a fiscal crisis, it’s because it doesn’t have the fiscal ability to bail out its banking sector. More analogous to Spain or Ireland than Greece.

    That’s what makes this all really pernicious. Instead of forcing the loss onto the banks and shareholders, the EU is protecting the rich and forcing the losses onto depositors. Because we all know that we can’t do anything to upset the financial gods of the universe.

    Like or Dislike: Thumb up 3 Thumb down 0

  22. Tyrell says:

    “Confiscate money from its citizens” Seems like that is already going in some country that is trillions in debt !!

    Like or Dislike: Thumb up 0 Thumb down 1

  23. Ben Wolf says:

    The Troika now has two choices: it can put together a rescue package on Cyprus’ terms, or watch it leave the euro and pave the way for wider disintegration. The folks in Brussels weren’t expecting this, not when every nation has bowed to their demands as they enjoyed caviar and first-class wine on the backs of millions being driven into poverty.

    @Dave Schuler

    The plan imposed a 6.75% tax on depositors with less than 100,000 euros. There was no targeting of Russian oligarchs, only the intent to force people with no responsibility for the continued euro clusterfuck to foot the bill for dealing with the fallout.

    Like or Dislike: Thumb up 1 Thumb down 0

  24. Ben Wolf says:

    Update: please dispense with my comment in moderation. I inadvertently typed in the expletive I had in my mind at the time.

    The Troika now has two choices: it can put together a rescue package on Cyprus’ terms, or watch it leave the euro and pave the way for wider disintegration. The folks in Brussels weren’t expecting this, not when every nation has bowed to their demands as they enjoyed caviar and first-class wine on the backs of millions being driven into poverty.

    @Dave Schuler

    The plan imposed a 6.75% tax on depositors with less than 100,000 euros. There was no targeting of Russian oligarchs, only the intent to force people with no responsibility for the continued euro clusterf**k to foot the bill for dealing with the fallout.

    Like or Dislike: Thumb up 0 Thumb down 0

  25. matt bernius says:

    BTW, for those looking for an excellent and quick primer on the Cyprus crisis, NPR’s Planet Money team does a great job of covering it — the Crisis’ origins, the proposed deal, why it was declined, and some of the broader implications — in under five minutes:

    http://www.npr.org/blogs/money/2013/03/21/174889908/why-cyprus-matters
    (Audio and Transcript)

    Like or Dislike: Thumb up 0 Thumb down 0

  26. grumpy realist says:

    Well, it looks like Cyprus is now rethinking its vote, after getting cold-shouldered by everyone on any other rescue plan. (I especially liked the touch of trying to get Russia to bail them out–essentially bailing out ex-pat Russians who put their money into Cyprus to get around Russian taxes. Yah, if I were running Russia I wouldn’t be too amendable to help them out either.)

    Bluntly, Cyprus decided it was going to act like a tax haven but didn’t have the clout to back it up and has managed to piss off all the wrong people. Plus Merkel realizes, with elections coming up, that the image of bailing out ill-run Cyprus banks to shore up the bank deposits of rich Russians isn’t going to go over very well in Germany.

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