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Home » Online Forex Trading Blog » Cyprus Sinks Euro, Russian Investors

Cyprus Sinks Euro, Russian Investors

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The euro was dealt another blow over the weekend when the island nation of Cyprus needed emergency bailout funds to sustain the country’s banks. Residents of Cyprus did not wait for the political outcome and drained ATMs of all available cash. Meanwhile, the country declared Monday and Tuesday bank holidays, giving Parliament time to shape a bailout plan.

However, the 56-member Cypriot Parliament is as dysfunctional as a Parliament can get. No single party has a majority and three parties have already said they will not approve the proposed tax levy system suggested by Brussels over the weekend. This caused the expected Sunday vote to be postponed until Tuesday, prompting a run on ATMs.

The weekend plan calls for Cyprus to impose a tax on bank accounts in the country’s banks. This would raise a healthy portion of a 7 billion euros and would be added to another 10 billion euros furnished by the ECB. The country, long believed to be a primary source for money-laundering activities, has established itself as an attractive offshore safe haven because of its policy of tax-free savings.

Once preliminary resistance to the proposed levy was voiced, government authorities were swamped with dissenters. The original proposal called for imposition of a tax amounting to 6.7 percent on bank deposits under 100,000 euros and a tax of 9.9 percent on deposits over 100,000 euros.

Some officials immediately began talks of tax-free deposits in the range of 20,000 euros or less, a reduction to 3.0 percent on deposits less than 100,000 and an increase in the tax on deposits greater than 100,000 euros to 12.5 percent.

Joerg Asmnussen, a key ECB negotiator in Brussels over the weekend responded, “It is up to the government alone to decide if it wants to change the structure of the contribution (from) the banking sector. The important thing is that the financial contribution of 5.8 billion euros remains.”

While the intent of the levy is clear, the act may send waves of doubt to other offshore banking countries inside and outside the EU. Additionally, banks in countries like Spain and Italy may also feel pressure from concerned investors.

EU officials were firm that this was a one-off solution but the Cyprus crisis underscores the continued instability in the region’s banking industry. The euro and European equity markets fell sharply off the news. US equities opened lower but were staging a rally by midday.

Russians Burned

While Parliament considers various courses of action, central bank governor, Panicos Demetriaces asked the important question, “The most important question is what would happen the following day if the bill isn’t voted. What would certainly happen is that our two big banks would need to be consolidated. This doesn’t mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way.”

The possibility of a banking collapse would weigh heavily on Russia whose investors have as much money on deposit in the country as all other international and national investors. Russia has been considering a 2.5 billion euro loan to help the country’s banks but has been slow to pull the trigger.

Many of Russia’s wealthiest investors have money in Cyprus banks. Russian President Vladimir Putin opposes the tax wholeheartedly describing it as, “unfair, unprofessional and dangerous.”

Half of the 70 billion euros in Cyprus banks are from internationals with the largest depositors being from Russia. According to Moody’s, at the close of 2012, Russian banks had $12 billion invested in Cyprus banks while private Russians had another $19 billion in the banks.

EU officials have said they expect Russia to extend the proposed 2.5 billion euro loan. If these funds are not forthcoming, the tax bite might well increase.

What markets are wary of is if this type solution could be implemented in other European banking sectors. The levy would be a blow to internationals who believe their money is safer in foreign banks. Cyprus made a determination to be a financial center where discretion rules and tax policy was most favorable to investors.

However, the bigger issue is that there is one more unexpected crisis in an unsettled economic area. Look for the euro to fall sharply in upcoming sessions.

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About the Author -

Hiland DoolittleHiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses. Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.

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