Opinion

Hugo Dixon

All Cyprus plan Bs look dreadful

Hugo Dixon
Mar 20, 2013 10:49 UTC

The Cypriots have an expression: eninboro allo. It means: I cannot take any more of it.

There was jubilation last night outside the small Mediterranean island’s parliament when every single MP either voted against a plan to tax depositors or abstained. The message was that people of Cyprus had had enough and weren’t going to let the big bullies, led by Germany, boss them around.

The plan to tax insured deposits was a dreadful mistake – I have described it as legalised bank robbery. But the deposit tax was part of an unpalatable but available 10 billion euro bailout, agreed with the euro zone. That plan A is now at risk. As Cypriots contemplate possible plan Bs, their jubilation may start to fade: all of them are also dreadful.

Some observers, including my colleague Anatole Kaletsky, believe that Germany will now blink. With an election looming there in the autumn, that seems most unlikely. Berlin has said it is unwilling to back any loan bigger than 10 billion euros, already a non-trivial 60 percent of Cyprus’ GDP. The problem is that Nicosia needs 17 billion euros to recapitalise its banks and cover the government’s own expenses, leaving a 7 billion euro hole.

Berlin is right to refuse to lend more. Even with 10 billion euros, Cyprus’ debt will rise to around 130 percent of GDP. At 17 billion euros it would shoot up to around 160 percent of GDP. Under the original plan, debt was supposed to fall to 100 percent by 2020. But after the events of recent days, confidence will be so crushed and the island’s offshore finance business model so broken that this forecast now looks pie in the sky.
So what are Cyprus’ options? There are broadly three: sell its soul to Russia; default and possibly quit the euro; or patch together a new deal with the euro zone. They are all bad, but the last one is the least bad, for both Cyprus and the rest of Europe.

Cyprus deposit grab sets bad precedent

Hugo Dixon
Mar 18, 2013 09:07 UTC

Cyprus’ deposit grab sets a bad precedent. Money had to be found to prevent its financial system collapsing. But imposing a 6.75 percent tax on insured deposits – or even the 3 percent being discussed on Monday morning – is a type of legalised bank robbery. Cyprus should instead impose a bigger tax on uninsured deposits and not touch small savers.

Confiscating savers’ money will knock confidence in the banks. Trust in the government will also take a hit, since Nicosia had theoretically guaranteed all deposits up to 100,000 euros. Small savers should be encouraged not penalised. They are the quiet heroes of the financial system, who squirrel away their savings, not those who drag it down by engaging in borrowing binges.

Nicosia has not technically broken its promise to guarantee small deposits. That’s because it is not the banks which are failing to repay savers – something which would have triggered the insurance scheme. Instead, it is the government itself which is grabbing a slice of deposits. The pill is also being sugared by giving savers shares in the banks and some of the hoped-for revenues from a possible natural gas bonanza as compensation. That said, the mechanism is still an effective breach of promise.