Monday

23rd Oct 2017

Cyprus heading for bank run after bailout deal

  • Pensioners in Cyprus have to take losses on their savings (Photo: Berge Gazen)

The Cyprus bailout deal forcing losses on all bank customers - from pensioners to Russian oligarchs - is leading to bank run which sets a dangerous precedent for other troubled eurozone countries.

Cypriot pensioners, mothers, students and business people all flocked to ATM machines over the weekend trying to get the most out of their bank accounts. Cash payments were possible until the machines were emptied, but any online transactions were halted as banks are closed over the weekend and there is a bank holiday on Monday.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

Despite reassurances by local and EU politicians, and despite an EU law stating that deposits of up to €100,000 are 100 percent guaranteed, the news from Brussels on Saturday morning was that every customer of a Cypriot bank - rich and poor - has to chip in to the country's €10 billion bailout.

With big money flowing out of the country over the past few weeks, the deal puts the burden on the small depositors, prompting the newly elected president, Nicos Anastasiades, to promise that he will seek "adjustments" to the deal protecting the most vulnerable depositors.

Speaking on national tv Sunday evening (17 March), Anastasiades said the bailout deal was "certainly not the solution we wanted, but the least painful option" for his country to avoid bankruptcy. He urged political parties to back the agreement which cuts 6.75 percent off bank deposits of up to €100,000 and 9.9 percent off savings above €100,000.

Greek depositors are exempt, however, and so are holders of Cypriot bank or state bonds, including the European Central Bank. The British government has also said it will safeguard the savings of British soldiers and civil servants who are on the island.

The Cypriot Parliament is due to vote on this "one-off" levy on Monday, after an initial emergency vote on Sunday was postponed. The ruling coalition is relying on a razor-thin majority, which could be flipped if only two MPs vote against.

The Communist opposition is voting against the deal and is advocating a referendum on the country's euro membership.

The unprecedented bailout terms are mainly due to German insistence that all bank depositors take losses, Germans largely viewing Cyprus as a tax haven and money-laundering hub for Russian oligarchs.

"This way the ones responsible are partly contributing to the rescue, not only the taxpayers in other countries," German Chancellor Angela Merkel said Sunday during a party gathering in the northern region of Mecklenburg-Vorpommern.

Her finance minister Wolfgang Schaeuble, who negotiated the deal until the early hours of Saturday, said this had to be done because the Cypriot banking sector was the largest in the EU in relation to the size of the population.

"People who make money in good times with banks and financial investments, those people also bear the risk," Schaeuble said on German public tv ARD on Sunday night.

He also said the ECB and the Cypriot government were to blame, not Germany.

"We would obviously have respected the deposit guarantee for accounts up to 100,000," he said. "But those who did not want a bail-in were the Cypriot government, also the European Commission and the ECB, they decided on this solution and they now must explain this to the Cypriot people."

The Social-Democratic opposition, on whose votes Merkel has to rely to get the Cypriot bailout approved in the German Parliament, has threatened to derail any deal that does not offer enough protection for the German taxpayer.

"It is going in the right direction, but the direction alone is not enough," Social-Democrat leader Peer Steinbrueck told MDR radio.

His finance expert in the Parliament, Carsten Schneider added that "what matters is that our demands are met in respect to Cyprus changing its business model on corporate tax, illegal financial transfers and introducing a financial transactions tax."

Meanwhile, European Parliament chief Martin Schulz, himself a German Social-Democrat, told Welt am Sonntag it was fine for bank customers to chip in, but called for a "socially acceptable solution."

"There is room for improvement, for instance to exempt savings of up to €25,000," Schulz said.

Finance commentators are warning that by making depositors insecure about their savings, other troubled eurozone countries are now also facing the risk of a bank run.

"It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying 'time to stage a run on your banks!'," US economist Paul Krugman writes on his blog.

Felix Salmon, a finance blogger for Reuters, writes that "this decision is important not only because of the precedent it sets with regard to bank depositors, but also because of the way in which it points up just how powerless all the Mediterranean countries (plus Ireland) have become."

"More than ever before, it’s Germany’s Europe. That’s bad for Cyprus — and it’s not even particularly good for Germany," Salmon adds.

Russian offer

Russian state-run gas giant Gazprom is meanwhile offering to restructure Cyprus' bad bank debt in return for control over the island's recently discovered gas reserves, local media reports.

According to Cypriot Sigma tv, Gazprom officials tabled a proposal to Anastasiades on Sunday evening, but sources close to the president indicated he is not willing to accept the offer.

"The president is not going to discuss this plan because he wants a solution that will come from the EU," one source was quoted as saying.

Stakeholders' Highlights

  1. Martens CentreI Say Europe, You Say...? Interview With Commissioner VP Jyrki Katainen
  2. Mission of China to the EUPresident Xi Jinping Proposes Stronger Global Security Governance at Interpol Assembly
  3. European Friends of ArmeniaEU Engagement Could Contribute to Lasting Peace in Nagorno-Karabakh
  4. UNICEFViolence in Myanmar Driving 12,000 Rohingya Refugee Children Into Bangladesh Every Week
  5. European Jewish CongressBulgaria Applauded for Adopting the Working Definition of Antisemitism
  6. EU2017EENorth Korea Leaves Europe No Choice, Says Estonian Foreign Minister Sven Mikser
  7. Mission of China to the EUZhang Ming Appointed New Ambassador of the Mission of China to the EU
  8. International Partnership for Human RightsEU Should Seek Concrete Commitments From Azerbaijan at Human Rights Dialogue
  9. European Jewish CongressEJC Calls for New Austrian Government to Exclude Extremist Freedom Party
  10. CES - Silicones EuropeIn Healthcare, Silicones Are the Frontrunner. And That's a Good Thing!
  11. EU2017EEEuropean Space Week 2017 in Tallinn from November 3-9. Register Now!
  12. European Entrepreneurs CEA-PMEMobiliseSME Exchange Programme Open Doors for 400 Companies Across Europe

Stakeholders' Highlights

  1. CECEE-Privacy Regulation – Hands off M2M Communication!
  2. ILGA-EuropeHealth4LGBTI: Reducing Health Inequalities Experienced by LGBTI People
  3. EU2017EEEHealth: A Tool for More Equal Health
  4. Mission of China to the EUChina-EU Tourism a Key Driver for Job Creation and Enhanced Competitiveness
  5. CECENon-Harmonised Homologation of Mobile Machinery Costs € 90 Million per Year
  6. ILGA-EuropeMass Detention of Azeri LGBTI People - the LGBTI Community Urgently Needs Your Support
  7. European Free AllianceCatalans Have Won the Right to Have an Independent State
  8. ECR GroupBrexit: Delaying the Start of Negotiations Is Not a Solution
  9. EU2017EEPM Ratas in Poland: "We Enjoy the Fruits of European Cooperation Thanks to Solidarity"
  10. Mission of China to the EUChina and UK Discuss Deepening of Global Comprehensive Strategic Partnership
  11. European Healthy Lifestyle AllianceEHLA Joins Commissioners Navracsics, Andriukaitis and Hogan at EU Week of Sport
  12. Nordic Council of MinistersNordic Council Representative Office Opens in Brussels to Foster Better Cooperation