Talk of turning over the savers of Cyprus to prop up failing banks seems to have fizzled out, after the country’s parliament knocked for six the proposals to make them give up 10% of their savings. Many across the world are thinking: ‘What a coup for the Cypriot people’, and ‘the voice of democracy speaks louder than ever’, but unfortunately, it’s not that simple.
Rejecting the eurozone’s bailout plan may be a Pyrrhic victory. So desperate is Cyprus’ financial situation that political leaders are now working against the clock to find an alternative before financial system goes into complete meltdown. Cypriot president Nicos Anastasiades is in frantic meetings with other party leaders this morning trying to hash out another plan to present to lenders, whilst finance minister Michalis Sarris is in Moscow, ostensibly to agree better terms for the loans Russia has given Cyprus. But perhaps also sounding out the prospects for a larger Russian deal, involving rights to Cyprus' newly discovered gas reserves...
So what exactly have they rejected? The EU and IMF offered to stump up for the €10bn that Cyprus needs to stop its banks collapsing, but only if people with deposits in those banks paid a one-off tax of 10% to raise an additional €5.8bn. This would have been the first time since the global financial crisis struck that a bank bailout would be supplemented by a compulsory contribution from unsuspecting savers. Needless to say, there has been widespread outrage at the proposals.
Leaders then tried to soften the deal by exempting people with savings of less than €20,000, reducing the levy to 6.75% for people with less than €100,000, and leaving the 10% levy for those with more than that. But 36 MPs rejected the deal, 19 abstained, and just one voted in favour (we suspect he or she will not be re-elected).
But even if Cyprus does manage to get into bed with Russia, it could mean having to leave the euro – if you turn down the deal, you’re effectively turning down the whole system.
Cyprus may have rejected one tough deal, but leaders in Russia now know they have the country in a corner. For that reason, you can bet Putin won’t be dispatching any money unless there is a similarly exploitative agreement on the table.