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Inside Story

The Cyprus effect

How will the bank levy impact the country's economy and other eurozone members?
Last Modified: 18 Mar 2013 16:14

It is a decision made to obtain financial aid and to prevent the island nation of Cyprus from going bankrupt.

Just three weeks into the job, and Nicos Anastasiades, the Cypriot president, is tackling the nation's debt crisis head-on, saying he had no choice but to force savers to forfeit up to 10 percent of their deposits to avoid a catastrophic banking collapse.

"It was something obviously unexpected, but we have to bear in mind that a series of unfortunate events took place ... and someone has to pay for them. There is no way to avoid the cost, there is no painless solution .... There is a cost attached to this crisis and we have to pay it."

- Demetris Georgiades, the financial editor for the Politis Newspaper 

Cypriots themselves are furious and they have responded by trying to clear out their accounts.

People with savings of less than $130,000  will pay a one-off tax of 6.75 percent. Those with anything more in their accounts will forfeit 9.9 percent of their savings.

The Gross Domestic Product (GDP) was worth over $24bn in 2011 - and the proposed bailout is more than half that figure.

The levies would generate $7,5bn - with depositors being compensated with the equivalent amount of bank shares.

Cyprus is also facing pressure from the EU to tighten the regulation of its financial system. Under particular scrutiny is the flow of billions of dollars to and from Russia. Germany has been trying for months to clamp down on alleged money-laundering. 

"It was not unexpected, we have seen that this has been entertained for weeks at least, and probably longer .... There is a case of certain big countries dictating what was happening ... I think what Germany and the other countries have not taken full account of possibly is the contagious effect of this ... I see it [Cyprus] as a domino which if it falls could cause other dominos to fall."

-  Bernard Casey, an academic from the Hellenic Observatory at the London School of Economics. 

More than $32bn of deposits in Cypriot banks are said to be controlled by Cyprus-based Russian companies. That accounts for one-third of total Cypriot banking deposits.

In 2011, Cyprus attracted almost $120bn of Russian investment. And that same year, almost $130bn flowed back to Russia.

That is five times more than the island's annual output - little of which is invested in the Cypriot economy.

But is it an effective way of getting at Russian investors? Should private savers foot the bill for Cyprus’ financial crisis? And what does it mean for other eurozone countries?

Joining presenter Jane Dutton on Inside Story are guests: Demetris Georgiades, the financial editor for the Politis newpaper; Fiona Mullen, an economist and political analyst; and Bernard Casey, an academic from the Hellenic Observatory at the London School of Economics.

"I think that it's a shame that they have hit the poorest as well as the wealthiest, but the alternative really is much worse .... Maybe after the initial shock of yesterday that's becoming the feeling now, which is why I think parliament probably will pass this tomorrow ... We found out this week that when you are a small eurozone member you are not really an equal member."

Fiona Mullen, an economist and political analyst

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Source:
Al Jazeera
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