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EU's unbalanced attitude towards Greece and Cyprus

By Zhang Tingbin: 0 Comment(s)Print E-mail China.org.cn, April 1, 2013

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The modern credit system's worst nightmare took place on March 16 as the Eurozone agreed to bail out Cyprus with a rescue of 17 billion euros. The European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) will provide 10 billion euros in funding, but with a prerequisite that Cyprus has to first raise 5.8 billion on its own.

EU's unbalanced attitude towards Greece and Cyprus.[File photo]

Under the detailed plan, people in Cyprus with less than 100,000 euros in their accounts would have to pay a one-time tax of 6.75 percent, while those with sums over that threshold would pay 9.9 percent in tax. Depositors will be compensated with the equivalent amount in shares in their banks. Also, Cyrus is under pressure to escalate its corporate tax rate to 12.5 percent from its current 10 percent.

International investors responded to the news with shock, rattling stock markets in most countries, especially those in Europe, in addition to commodity markets.

Similar practices have occurred in the past. Since the international financial crisis that broke out in 2008, the U.S.'s Federal Reserve stole dollar holders' wealth with quantitative easing and the Greek government wrote off 75 percent of its sovereign debt.

But this is the first time for a government directly robbing investors' money from their bank accounts by means of taxation. The move has reduced the Cypriot government to would-be robber barons.

Cypriots naturally opposed the decision. The taxation bill, after two rounds of revisions, dropped levy on deposits below 20,000 euros, before eventually being rejected by the Cypriot Parliament.

Later, the Cypriot government turned to its biggest foreign investor and depositor Russia, hoping to secure a 5-billion euro new loan, while extending the earlier 2.5-billion-euro loan and lowering its interest. Russia rejected the new loan request but agreed on Cyprus' latter request.

Meanwhile, the ECB has demanded Cyprus raise the 5.8 billion fund following the bailout plan, or risk losing the 10-billion euro rescue package.

Sources close to the matter said the largest disparity in the Cyprus-EU negotiation is whether to divide Bank of Cyprus, the biggest bank in its country.

The Cypriot government wishes to retain the bank's present scale of operation, while levying a heavy 20 percent tax on accounts holding more than 100,000 euros, but agreeing to compensate the savers with stocks and bonds.

Both the ECB and the EC accepted Cyprus' offer, but the IMF still demands that the Bank of Cyprus should be separated.

Cyprus is known as collateral damage in the earlier Greek government-debt crisis. As of June 2011, Greece held 28 billion euros in Cypriot banks, accounting for one third of the small island country's total bank assets, or 170 percent of its annual GDP. Some 27.8 percent of the money was issued back to Greek people in the form of loans.

But the European Union (EU) has taken a strangely strong stance, threatening to drop Cyprus' Eurozone membership, contrary to its compromise in the Greek sovereign debt crisis.

What has caused the EU's unbalanced attitude? In other words, what is the EU thinking about? The reason has to be as follows:

First, abandoning Cyprus will cause maximum damage to Russia. Second, the Eurozone has to find a negative example to threaten other countries which attempt to quit the Eurozone in the future. Cyprus does not weigh much in the entire EU stake. But its doom – social turmoil, plummeting living standard – will effectively shock those disobedient MPs and people in other EU countries.

It is fair to say Russia has remained helpless in Cyprus' crisis. Moody's Investor Service noted that Russian banks have aggregately issued US$30-40 billion-worth in loans to Russian companies investing in Cyprus. Once Cyprus starts capital controls, the fund may never return to Russia, which in turn will affect Russian banks' capital quality.

Moody's also said Russian companies' deposits in Cyprus would total US$19 billion, accounting for one quarter of Cypriot banks' total deposits.

Cyrus is Russian manufacturing tycoons' tax heaven, given that its 10 percent corporate tax is unavailable elsewhere in Europe. A tax hike will cause further losses to Russian businessmen.

But the EU is risking shooting its own feet with such economic-political treachery. The attempt to force a member state to rob its own savers amounts to opening Pandora's Box. Other countries will likely imitate the Cypriot government's problem solution and come up with even more irrational measures should similar crisis happen to them.

Amid Cyprus' crisis, the U.S. dollar and gold both regard it as a prime opportunity. The European capital fearing of Cypriot taxation will flow to the dollar zone, because compared with so-called quantitative easing, investors and common people alike are even more afraid of their money being directly robbed by the government. Gold, then, can well protect savers' wealth in the form of hard currency. It was indeed Cyprus' crisis that caused last week's strong gold market.

The author is the founder of CNYUAN Think Tank.

The article was first published in Chinese and translated by Chen Boyuan.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.