Cyprus Bailout Levy
Since 2008, the European banking system has been under great stress due to bad mortgages leading to bank failures and bail outs for Greece, Ireland, Portugal, Spain and now Cyprus. In March 2013, the Cyprus government is negotiating a Cyprus bailout levy in exchange for €10billion ($13billion) from the European Union and International Monetary Fund. The levy is very unpopular with the people.
Bailing Out Cyprus Banks
The Eurozone agreement with Cyprus amounts to a levy of 6.75% (or 3%) on deposits below €100,000 and 9.9% (or 12.5%) above. The original plan has faced strong opposition. The bankers and politicians attempted to put their plan into effect over a three-day weekend. There was not enough support in the Cyprus legislature for the original levy, so there was a shift to increase the tax percentage on higher incomes.
Meanwhile, the original three-day “Bank Holiday” has been extended to a week. The title, “Bank Holiday” is a misnomer because it means that customer accounts are frozen. This has increased the uncertainty in capital markets. The UK has rightly identified the economic downturn as a “Credit Crunch.”
Theft, Tax or Levy
Banks prepared for the levy by freezing the allocated amount from accounts. They also placed capital controls in place to restrict electronic money transfers. Other nations have seen money flow out of their countries after experiencing financial troubles. Banks offered shares in the failed institutions in exchange for the levy.
Needless to say, savers were outraged. Consumers claimed this was theft, robbery and stealing. Why were savers being punished for the failures of banks? One disgusted customer drove his bulldozer in front of a bank. Depositors were lined up in front of ATMs to withdraw as much money as they could. Some customers are living paycheck-to-paycheck and any reduction in their savings would be tough on them.
The international banking system is all tightly connected. Lyndon Larouche compared the 2008 Banking Crisis with the Bubonic Plague of the 1300s. The use of a quarantine prevented the Bubonic Plague from spreading. Unfortunately, the 2008 Banking Plague has not been contained.
Cyprus had significant exposure to Greek loans. Cyprus leaders claimed that this bailout levy was required due to a “state of emergency.”
Fear of Bank Panic
The greatest fear of a financial institution is a bank run or panic. Unfortunately, this may be occurring in Cyprus. Depositors will wonder if their money is safe. As customer accounts are frozen, there is less capital for consumer spending. This could damage the entire European banking system.