Why is the Tiny Island of Cyprus Making Global Headlines ?

In an unprecedented move,the European Union has mandated that Cyprus tax its bank depositors to raise at least 5.8 billion as part of the 10-billion bailout package which the locals, Russians and almost everyone from the financial markets are aghast at.Ruchira Roy explains

WHY SHOULD THERE BE A NEGATIVE REACTION TO A BAILOUT

The imposition of a bailout cost on bank depositors sends dangerous signals to depositors elsewhere in the Eurozone.This could lead to depositors in Portugal,Spain and even Italy to conclude that they may face the same fate as Cypriots and begin a run on many banks.This would leave the concept of deposit insurance meaningless

WHAT ARE THE TAX RATES

Under the plan,Cyprus will impose a levy of 6.75% on deposits of less than 100,000 and 9.9% for 100,000 or more.This does not distinguish between the Russian and Ukrainian millionaires who have stashed their ill gotten wealth,and the local widow who had squirreled away her savings

WHY DID THE EUROZONE PROPOSE SUCH A TAX

It may be purely political,especially in Germany.To silence growing criticism in Germany about the practice of bailing out nation after nation,the German chancellor Angela Merkel might have been forced to send a signal that bailouts dont come for free

IS IT A DONE DEAL

Not yet.A vote on the tax,probably with some changes is needed and that may be held on Tuesday.There could be social unrest with banks remaining shut.The Russian President Vladimir Putin terming it unfair,unprofessional and dangerous, opens the scope for it turning into a bigger conflict

WHY IS PUTIN ANGRY AT THE EU

Nearly half the deposits in Cyprus banks are supposed to be that of Russian oligarchs,notorious for activities in the former communist state and which may have been earned through underhand means

WHY DID THE RUSSIANS INVEST IN CYPRUS

A double-tax avoidance treaty and low tax rates made Cyprus the conduit of choice for Russians moving money into and out of their country.Moodys says Russias exposure is about $60 b including loans to companies registered in Cyprus

WILL THE BAILOUT TURNOUT TO BE A BOON,OR A CURSE

The possibility of the bailout package failing is quite high.It is certain that Russian funds will flee Cyprus.There could be social issues worse than what we saw in Greece.Probably,this could end up nullifying the three year efforts to stabilise the Eurozone

WILL THIS END THE EUROZONE

Whether this ends the Eurozone now or later,this has probably sowed the seeds of a banking crisis in the Eurozones peripheral countries such as Spain,Portugal and Italy.If depositors in these countries believe that they may have to bear the burden of bailout in the future,it will be a free-for-all.

Economic Times, New Delhi, 19-03-2013

 

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