Financial markets in Asia and Europe fell sharply today thanks to the unusual terms of the EU bailout of Cyprus. A tax of up to 10 percent on bank deposits in Cyprus was proposed to defray some of the cost of the bailout. The plan is likely to be softened before the Cypriot parliament votes on the package tomorrow. But, has damage already been done?
Though the levy on deposits is unusual method, there’s no mystery why it is being imposed on bank accounts in Cyprus. The Germans in particular insisted on it. They believe that large amounts of cash in the Cypriot banking system belong to Russian money launderers, and that it’s only right that they too should bear some of the cost of the bailout.
But the levy also hits ordinary law abiding depositors. And that’s dangerous says fund manager Henry Dixon, who believes it could undermine confidence in the banks in other troubled eurozone countries:
"I think this is a scary measure," says Dixon. "It would be absurd to think that people are not thinking about depositors in Ireland, Portugal, Italy, Spain and thinking maybe -- you know -- my money’s better out of the bank and under a mattress."
There are even doubts about the legality of the savings tax since most European bank accounts of $130,000 are insured.
And while much of the effort expended on the eurozone debt crisis has focused on re-building trust in the banks, there are some fears that this latest proposal could trigger a bank run.
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All eyes are on the tiny island nation of Cyprus today as the country debates a controversial financial rescue plan. The country, which reached a $10 billion bailout agreement with European regulators over the weekend, is considering a one-time tax on bank deposits in order to offset some of the costs. Bank accounts with less than $130,860 could be taxed up to 6.75 percent, and accounts with more than $130,860 would be taxed at an even higher across-the-board rate.
As you read about the bailout, here are five things you need to know about Cyprus:
1. Where in the world is Cyprus? The country is located south of Turkey in the Mediterranean Sea, joined the European Union in 2004, and adopted the euro in 2008. Cyprus has a yearly GDP of $22 billion, ranking as the world's 125th largest economy. The size of its economy is roughly equal to Jamaica, Burkina Faso, or Zambia. The country accounts for about only 0.2 percent of eurozone economic output.
2. How does Cyprus compare? In 2012, unemployment in Cyprus was 8 percent, lower than many other EU countries including France (9.8 percent), Italy (10.9 percent), Ireland (14.6 percent), and Spain (24.9 percent). In 2012, Cyprus had public debt amounting to 81 percent of its GDP. As a comparison, Germany's public debt accounts for 80 percent.
3. What's got Cyprus down? Cyprus' financial problems are heavily tied to Greece. Cyprus' biggest banks are among the largest holders of Greek bonds and have a significant Greek presence through bank branches and subsidiaries.
4. What's Russia got to do with it? Some of Cyprus' biggest bank customers are Russian. EU officials are weary of bailing out Cyprus because the country is a known tax haven and location for Russian money launderers. Bank assets in Cyprus were 896 percent of GDP in 2010, as compared to an average of 357 percent in the EU. Though the proposed levy is aimed at addressing this concern, smaller depositors worry they will be hurt unfairly by the tax.
5. Will the tax actually go through? Cyprus' parliament is likely to lower the tax before passing the bailout measure. Though the current agreement calls for a 6.75 percent tax on accounts less than $130,860, experts expect the tax to fall to closer 3 percent for these smaller depositors. Some even say the tax proposal will be abandoned altogether.
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