Cyprus Buys Time, Keeps Banks Closed Until Thursday
The Cypriot government has decided to extend its single-day banking holiday through Thursday, keeping banks closed and buying parliament a little more time to mull over a deal with European Union creditors that would impose a financial transaction tax as high as 9.9 percent on depositors, according to reports from both the Associated Press and Reuters.
“Tuesday and Wednesday are bank holidays,” one source told Reuters.
The Cypriot government will formally announce the holiday extension later on Monday, the source added.
SHOCK & AWE
The Cyprus bailout deal has sent shockwaves through Europe and the U.S. — shockwaves that have the small Mediterranean country scrambling to amend the original bailout agreement.
“The Cypriot government is now trying to modify the terms of the original plan and in particular to get a better deal for small savers with less than €100,000,” the AP reports. “The weekend deal foresaw a one-off charge of 6.75 percent on those savings, rising to 9.9 percent for those above the €100,000 mark.”
Many have expressed alarm at the deal because it breaks a previous taboo: It puts the financial burden on depositors (as opposed to bondholders). Ordinarily, bailouts are supposed to prop up struggling banks while protecting depositors from financial harm. The idea is that if depositors have nothing to fear, they won’t rush to withdraw their funds, causing a run on the banks.
However, with the proposed financial transaction tax, it’s feared that the Cyprus bailout deal will do just that — and not just in Cyprus but all over the EU. Cypriots have already scrambled to withdraw their funds. But according to certain reports, ATMs have not been functioning properly and the government has made it all but impossible to transfer money outside the country.
And what’s to stop depositors in, say, Greece, Ireland, or Spain from withdrawing their cash? How do they know that a similar depositors tax won’t come their way?
Needless to say, there is no guarantee that this won’t happen and it’s this sort of uncertainty that leads to economic scares and — you guessed it — a run on the banks.
Russian businesses have an estimated $19 billion stashed away in Cypriot banks. So you better believe Russian President Vladmir Putin in unhappy with the proposed depositors tax.
“Putin said such a decision, if taken, would be unjust, unprofessional and dangerous,” said Putin’s spokesman Dmitry Peskov, according to Russian news agencies.
Meanwhile, much frustration has been directed at Germany, the EU’s most financially stable member, for allegedly insisting on the financial transaction tax as a part of the bailout agreement.
However, the Germans claim the depositors tax wasn’t their idea, according to Reuters.
“The levy on deposits below 100,000 euros was not the creation of the German government,” said German Finance Minister Wolfgang Schaeuble. “If one reached another solution we would not have the slightest problem.”
And back in the United States, markets on Monday reacted poorly to the proposed Cyprus deal:
For their part, Cypriots have taken to the street to protest the proposed bailout deal, according to Bloomberg.
UPDATE: Markets closed lower on Monday:
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