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Cypriot lawmakers reject bailout deal, weakening eurozone

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Published 20 March 2013

Cyprus overwhelmingly rejected yesterday (19 March) a proposed levy on bank deposits as a condition for a European bailout, throwing international efforts to rescue the latest casualty of the eurozone debt crisis into disarray.

Breaking with previous practice that depositors' savings were inviolable, eurozone finance ministers announced over the weekend a one-off tax on Cypriot bank accounts would be imposed as part of a €10 billion bailout by the European Union.

The measure infuriated ordinary Cypriots, who staged noisy demonstrations in the capital, Nicosia.

With hundreds of demonstrators outside the parliament chanting "They're drinking our blood", the ruling party abstained and 36 other lawmakers voted unanimously to reject the bill, bringing the Mediterranean island to the brink of financial meltdown.

The vote is considered  is a stunning setback for the 17-nation currency bloc, angering European partners and raising fears the crisis could spread. Lawmakers in Greece, Portugal, Ireland, Spain and Italy have all accepted austerity measures over the last three years to secure European aid.

With an estimated 37% of the €53 billion of deposits in Cypriot banks belonging to foreigners,many of whom are Russian investors and businesses according to experts, Cypriots are not the only savers that could lose money under the deal.

Finance Minister Michael Sarris had already headed to Moscow, amid speculation Russia could offer assistance given the high level of Russian deposits in Cypriot banks. President Nicos Anastasiades, barely a month in office, spoke by phone with Russian President Vladimir Putin after the vote.

Anastasiades is due to meet party leaders this morning  to explore a way forward.

EU countries had warned they would withhold €10 billion in bailout loans unless depositors in Cyprus, including small savers, shared the cost of the rescue, an unprecedented step in the stubborn debt crisis.

The European Central Bank had threatened to end emergency lending assistance for teetering Cypriot banks, which were hard hit by the financial crisis in neighbouring Greece.

Germany, facing an election this year and increasingly frustrated with the mounting cost of bailing out its southern partners, said Cyprus had no one to blame but itself for the gravity of the situation.

Germany’s frustration

"Cyprus requested an aid programme," German Finance Minister Wolfgang Schäuble told ZDF television. "For an aid programme we need a calculable way for Cyprus to be able to return to the financial markets. For that, Cyprus's debts are too high."

Dutch Finance Minister Jeroen Dijsselbloem, who chairs the Eurogroup of finance ministers, said the bailout offer still stood providing the conditions were met. European Central Bank Governing Council member Ewald Nowotny called on Cyprus to show "discipline and the readiness to act rationally."

An important issue in negotiations has been the high level of deposits held in the island's banks by non-EU citizens and companies, notably from Russia, where Cyprus has established itself as a major provider of offshore financial services.

EurActiv.com with Reuters

COMMENTS

  • What is going on? Is it:

    1. a bail-out (if so it feels more like killing the patient with the therapy)

    2. punishment (for trying to be an off-shore type of financial centre and move away from low margin mass tourism and maybe for being friendly to Russia -- but when was the trial?)

    3. stupidity by the Troika (well, that seems to go without saying going by their poor track-record; if these people worked for me, I'd have fired them by now.)

    4. a lack of imagination (we know these people seem to make caffeine-fuelled decisions while sleep deprived so should we be that surprised)

    5. Group Think (yes, dissent doesn't seem to be an option, and once more into the authoritarian, undemocratic Europe we plunge. I'm sorry, this is about solidarity, a coded word for suppression of dissent and the aura of consensus)

    Should they have been that surprised by the reaction in Cyprus -- they obviously aren't modelling their solutions before these wind-eggs are laid.

    By :
    terreverte
    - Posted on :
    20/03/2013
  • Where has the democracy gone?
    What the parliment of cyprus has done is save thier country from years of undemocratic eurogroup/trioka medeling and dictatorship in thier country and stop the plundering of the huge amounts of cash. This is highway robbery pure and simple and shows how low these euroextremists will go for their rotten euro.
    This shows the rest of europe what these people are capable of, law or no law. They make the rules as they see fit.
    This whole euro thing is breeding more and more extremists on both sides , its time to stop and go back to our own currencies and repair the damage, its getting out of hand..

    By :
    klassen
    - Posted on :
    20/03/2013
  • "weakening eurozone" ?? or strengthening it?

    With all due respect to the EurActiv team, you ought to remember the difference between journalism and opinion.

    By :
    Question
    - Posted on :
    20/03/2013
  • Nós, na Europa, não estamos a perceber o que se está a passar! Não tem nada a ver com a liberalização económica, dos mercados, com o neoliberalismo e com as boas ou más políticas. A questão é muito mais ampla e profunda e tem a ver com uma coisa, aparentemente, muito simples - a transferência dos 'mercados predominantes'. Basta olhar para a história, se quisermos perceber isto mesmo!
    Os mercados predominantes vão mudando de lugar, por várias razões: primeiro foi o mediterrâneo e as rotas do Oriente; depois o Atlântico e as rotas do Oriente (via marítima) e das Américas, e agora são as rotas do Pacífico, onde tudo está a mudar muito depressa e onde se está a nascer (a crescer) um novo mercado predominante. Nós, os da Europa, mesmo que consigamos manter a Europa como a maior economia do mundo, deixámos (no geral) de ser o mercado predominante,e passámos a ser somente os fornecedores, sem expressão, do novo mercado predominante. Por isso os pequenos negócios de comércio, as indústrias e tudo o resto está em decadência (sem retorno) o que não significa que as grandes empresas possam crescer muito mais. A questão é que por cada ponto percentual de crescimento da Europa no outro lado crescem dez vezes mais. E para a Europa se manter a maior economia do mundo (temporariamente)vai destruir-se e degradar-se, inevitavelmente. A Europa do futuro, que podemos esperar, é como um porto abandonado, lojas, fábricas, casas e tudo o resto abandonado, degradado, etc. Por outro lado, em relação á população, às pessoas, espera-se um cenário idêntico ao das grandes capitais que perderam a pujança do passado: abandono, pobreza, miséria e degradação social. Soluções? Infelizmente, como reza a história, não as há! Só por milagre conseguiríamos inverter esta tendência (histórica) e muitos já tentaram, no passado, e não conseguiram.
    Recomendações (aos governantes): não queiram ser a maior economia do mundo, esqueçam a competitividade , os números e as estatísticas - não vão conseguir lutar contra o inevitável! Concentrem-se numa Europa para dentro, reduzam as ambições e tentem minimizar os efeitos desta transformação,que é inevitável.
    José Catalão (sociólogo - de Portugal)

    By :
    José Catalão
    - Posted on :
    20/03/2013
  • Talk about scoring an own goal! The Cyprus situation has been spectacularly mishandled & at such a precarious time for the Eurozone.

    It looks like Eurozone policy makers may have let the contagion genie back out of the bottle after the ECB's OMT programme had so successfully contained it.

    The second point is that other peripheral Eurozone countries are watching Cyprus and the mood for rejecting austerity & other measures might now spread & would be another devastating blow to the Eurozone's authority and its ability to manage its own crisis.

    Thirdly, if Cyprus decides to leave the Euro this will set a key precedent. Everyone will know that it is possible to leave the Euro & speculation over the demise of the single currency will potentially reach new highs. The ECB's job will be massively complicated by the potential of bank runs as other depositors try to avoid the fate of the Cypriots.

    The Eurozone may have thought that Cyprus was a tiny insignificant country that can be pushed around, but overlooked the fact that in times of extreme anxiety and fear the smallest of factors can be massively amplified.

    By :
    Justin Pugsley, Principal, JJPAssociates
    - Posted on :
    20/03/2013
  • We, in Europe, we are not to understand what is going on! It has nothing to do with the economic liberalization of markets, with neoliberalism and the good and bad policies. The issue is much broader and deeper and has to do with something seemingly very simple - the transfer of the 'prevailing market'. We need only look at history to see if it's right!
    The predominant markets have changed places, for several reasons: first was the Mediterranean and Eastern routes, then the Atlantic and Eastern routes (sea) and the Americas, and now is the routes of the Pacific, where everything is changing too fast and where is born (to grow) a new mainstream market. We, in Europe, even if we manage to keep Europe as the world's largest economy, we stopped (in general) to be the predominant market, and we have become one of the external suppliers of this new big market, without expression, despite all numbers. This means that we are not involved in this growth, we are only helping them to grow even more. Therefore, small business trade, industry and everything else is in decline (no return) which does not mean that large firms can grow more and more.
    The point is that for each percentage point increase in Europe they, on the other hand, grow tenfold. And if Europe persists in the idea of keeping the world's largest economy, at the expense of the growth of others, will only accelerate this process and will only destroy and degrade herself, inevitably. The Europe of the future, we can hope, is like an abandoned harbor with shops closed, abandoned factories, dilapidated houses and everything else in the destruction process. Moreover, in relation to population, the people, can we expect a scenario identical to the big cities that have lost the vigor of the past: people neglect, poverty, misery and social degradation. Solutions? Unfortunately, as the story goes, there is none! Only by a miracle we could reverse this trend (historical) and many have tried in the past and failed.
    What we can recommend to our rulers? Do not want to be the world's largest economy, forget the goals of competitiveness, the numbers and statistics - cannot fight the inevitable! Focus on a Europe inwards, reducing the ambitions, and try to minimize the effects of this transformation, which is inevitable but not necessarily fateful.
    Jose Catalao (sociologist - PhD Student - Portugal)

    By :
    José Catalão
    - Posted on :
    20/03/2013
  • Absolutely right Justin. Made me think of butterfly wings and typhoons. Let alone the breathtaking incompetence of the proposed solutions.

    It does seem, though, that people just didn't think this through properly. I am not surprised given no ability to solve a problem, and clear evidence of decision-making and sleep deprivation.

    Political hubris usually means that you keep digging the hole which just makes things worse. Free movement rules will get in the way and we'll see amendments here to ensure there isn't capital flight. So much for the single market. What a mess.

    By :
    terreverte
    - Posted on :
    20/03/2013
  • There are solutions Jose, it is just that Eurozone politicians are essentially cowards when it comes to making the hard choices. Evidence of other ways of doing things are legion, but they aren't European and don't fit with some romantic notion of European exceptionalism. Well, the problems of state largesse, loss of competitiveness, fat civil services, and high taxation have come home to roost.

    Europe now is moving to global irrelevance. In our modern world, you can run, but you can't hide. Turning inward and isolation is no solution; they'll just be flight of people, capital and opportunity.

    Time for some really out-of-the box thinking!

    By :
    terreverte
    - Posted on :
    20/03/2013
  • Interesting item in the UK press (yes, UK) making a very good point that how the EU handles Cyprus provides insight into how the EU does things in general.

    It is increasingly clear that the Troika are essentially authoritarians as they see no other way to solve a problem than to force a solution on people. EU forced, so says the Cypriot government, a solution that in effect stole money from its citizens. This gives insight into fundamental ways of working and thinking at the most senior levels, where perhaps democratic accountability takes second place to bureaucratic processes, politicians' re-elections, and the misuse of information.

    The article asks the question: Can the EU be trusted? The answer looks like "No".

    By :
    terreverte
    - Posted on :
    21/03/2013
37% of the €53 billion of deposits in Cypriot banks belong to foreigners, many of whom are Russian investors
Background: 

The entire island of Cyprus is officially EU territory, but the country is divided. Turkey, an EU candidate, doesn’t recognise the Republic of Cyprus and has occupied the northern part of the island since 1974.

Cyprus is heavily exposed to the Greek crisis and needs to salvage its banking system, which in recent years has become a haven for rich Russians.

Eight months of inconclusive talks on a bailout package have turned tiny Cyprus into a big headache for the eurozone, triggering fears of a financial collapse that reignites the bloc's debt crisis.

Nicos Anastasiades, who won a resounding victory in the February elections, promised to “restore the credibility of Cyprus”.

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