It has been decided via the E.U. that in order for Cyprus to receive a bailout under a new mandate that the island nation needs to penalize depositors a tax proportional to a 100,000 EUR holding. Cyprus was set to vote on the new mandate this morning, but as of yet has not. Apparently politicians have felt the immediate wrath from the decision via their own citizens and fear that the crowd may become rather untamed. It is also noteworthy that a large amount of the island’s depositors are from outside of Cyprus and these people will not be pleased either. The chill coming from the island will be felt throughout Europe this week.
Cyprus is likely to approve of the mandate before its banks open for business this week, but not only is there an air of hostility on the island, there is a question about what will happen with banks in Spain and Italy too – there will be a fear of bank runs among the acknowledged weaker institutions. While E.U. officials say this is a one time scenario and will not be repeated in other nations, the people of Cyprus are likely to point out that they were assured that their deposits would not be seized by a large contingent of politicians. The E.U. and ECB will have to display a coordinated version of their confidence game.
Besides the EUR facing volatility tomorrow morning, Monday may also find that banking shares shake, rattle, and roll on the continent. Sovereign Debt markets could also be tested. There will not be much economic data from Europe tomorrow. What is taking place in Cyprus today and tomorrow will certainly be the focus.
For all the talk of a unified E.U. body, equality for all its citizens no matter where they live, it certainly looks like the people of Cyprus will feel rather isolated. While few will say it publicly, it appears that Cyprus has been punished by the E.U. for its rather unique regulatory environment when it comes to accepting bank deposits from abroad. But here is the glitch, it isn’t the depositors that put the nation at risk, it was largely a complex web of spending policies via local governments, possible corruption, and the lending practices of the banks that have caused the chaos. The litany of wrongs is long, but where isn’t it within many parts of Europe? So while the people of Cyprus shudder at what is likely to happen with their money now, the citizens of Spain, Italy, and other spheres (France perhaps?) have reason to be suspicious regarding the future safety of their money. Economic growth would cure plenty of these evils, but the recession that is plaguing Europe continues to create problems.