Cyprus: the failed seizure of bank deposits

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Cyprus is the fifth country to fall into the Troika’s trap of ‘Bailout and Restructure’ in the Eurozone crisis, yet it is the first to reject Germany and Brussels’s policy. This evening saw the crucial vote in parliament intended to rubber stamp the decision agreed at the EU’s Eurogroup meeting of 16 March. But this proved an impossible task after the massive outcry about measures to confiscate deposits forced parliament to reject the proposals.

The proposal put forward at the Eurogroup summit involved an unheard-of precedent from the Troika (the ECB, the EC and the IMF). It includes a direct seizure of bank deposits directly from people’s bank accounts. This has been called a ‘levy’ currently proposed at 6.75% of deposits in accounts up to ?100,000 and 9.99% for sums over ?100,000. This would mean depositors were paying for the recapitalisation as they would receive bank shares in return. This would make the depositors’ guarantee scheme entirely worthless and set a precedent for this measure to be implemented across other EU states, should the Troika decide.

This measure was destined to raise ?5.8 billion, as part of the ?17 billion that the Troika deem are necessary for Cypriot bailout. The remainder will be sourced by ?10 billion from the Troika and the rest was hoped to be contributed from Russia.

Bank deposits have already been frozen, ATMs have run dry and the banks were closed on Monday 17th as it was a bank holiday. Following the rapid destabilisation from the decision and the increased anger by depositors, the Cypriot authorities have decide to keep banks closed until Thursday and to keep the stock exchange shut, to prevent bank runs and the stock market collapsing. An indication of the emergency is evident by the decision by the UK Ministry of Defence to send a RAF plane with ?1 million in cash to supply its base of 2000 military in Cyprus, a remnant from when UK was an occupying force. In a contradictory move, the UK Chancellor George Osborne promised to guarantee all deposits by UK government and military personnel on the island; yet how much of this makes up the £1.7 billion of UK owned deposits is unknown.

The political tensions between the EU and Russia are increasing. Cyprus is a place for Russian oligarchs to deposit money and is largely assumed to be used for money laundering.
Russia has already agreed and disbursed parts of a ?2.5 billion loan to Cyprus from December 2011. Russian President Vladimir Putin has called the calling the decision to seize a percentage of deposits “unfair, unprofessional and dangerous” and Prime Minister Dmitry Medvedev likened the measure to “a confiscation of someone else’s money.” The measure apart from angering small depositors in Cyprus has obviously infuriated large depositors from Russia, who have already threatened that the proposed legislation has already severed confidence in Cyprus’ financial system.

The Cypriot Finance Minister Michael Sarris has flown to Russia to discuss other options. Current rumours for a plan B consist of the proposal of offering Russia to buy two Cypriot banks for the symbolic amount of one euro, echoing the sale of Greek Emporiki Bank by Credit Agricole in 2012. Other rumours circulating are that GazPromBank was offering Cyprus an offer to recapitalise its banks in exchange for exploitation rights for natural gas in Cyrpus’ exclusive economic zone. Although this has been officially rebutted by GazProm, the rumours are still circulating. Regardless, it is unlikely that Russia will agree to any hybrid model of bailout as was previously discussed over the weekend between the Troika and Russia.

Cyprus is in a historic moment, being the first country to vote against the Troika’s plans. It could oust the troika from the island and reject any future negotiations.