Cyprus and the European Union Banking Crisis

The European Union gave a €10 billion rescue to Cyprus, a small island country in the European Union. It is the fourth of seventeen Eurozone states to receive a bailout by the European Union and the International Monetary Fund. In order to gain more time to convince parliament to back a new tax on deposits, Cyprus said that they would not open up their banks until Thursday the 21^st of March.  This controversial tax is on bank deposits and in order for it to come into effect they must have the support of parliament.  Investors reacted poorly to the news as shares fell, and there was a run on cash machines over the past couple days.  

The plan to rescue Cyprus’ banks includes a one-time tax of 9.9% on deposits more than €100,000, and 6.75% on smaller deposits. In the past, the European Union has not done this with the bailouts of the other countries; instead they had strict budget restrictions.  With the rich bearing the majority of the burden already, talks of giving less of a tax to the smaller deposits is giving the wealthy an even more severe difference in tax than the smaller depositors.

Even though Cyprus is the third smallest country in the Eurozone and its economy (which is worth €18 billion) is being bailed out by a sum more than half its size. The banking sector in Cyprus is several times the size of the economy.  It is scaring investors that one of the smallest countries’ bailouts might threaten the whole European Banking industry, especially those struggling already like Italy and Spain. The levy could bring consumers to move their money to more secure European banks such as Germany or France, damaging the industry in South Europe. With concerns about money laundering and the large volumes of international deposits in Cyprus, they have agreed to an international anti-money laundering audit.

Countries all over Europe are also taking hits from the lack of investments and various bailouts. Banks are shedding assets, cutting costs and increasing capital reserves.  The Netherlands had to get rid of holders of subordinated bonds in the bank SNS Reaal after it was nationalized due to major investment losses. Also, the Irish government recently announced that it was going to liquidate the former Anglo Irish Bank, causing bondholders to take large losses. What changes to you see taking place in Cyprus? Is there a way to save the banking crisis in Europe?