People in Cyprus were furious that their savings almost got raided to pay the national debt in a move the government considered in a bailout deal to avoid losing its gas production to Russia, Reuters reported Tuesday.
European lenders are evidently nervous about the possibility of Russian involvement in a Cyprus bailout deal. The Russian state gas company, Gazprom, the largest extractor of natural gas in the world and the largest Russian company, offered to bailout struggling Cypriot banks in exchange for the right to gas production. But now the offer seems rescinded.
The bailout plan that was negotiated between the Cypriot government and the so-called “troika” of the European Commission, European Central Bank (ECB), and International Monetary Fund (IMF), didn’t pass in the legislature.
The plan was to confiscate 6.75 percent of the first €100,000 of each bank account and 9.9 percent of any money above that, but President Nicos Anastasiades changed the plan to exempt the first €20,000 in deposits. That likely means the plan wouldn’t raise the €5.8 billion demanded by the troika, but the hope was to mitigate the effect on average Cypriots. But even that more measured plan appears to be dead in the water.
The Russians, who were left out of the loop on Cypriot bailout talks despite an agreement to coordinate actions on Cyprus, have spoken out against the plans again, after president Vladimir Putin branded the bank levy "dangerous and unfair". Vladimir Chizhov, Russia's envoy to the EU, likened the levy to "forceful expropriation", saying it risked precipitating a collapse of the island's banking system.
Nearly half of all deposits held in Cypriot banks are held by non-residents, a significant proportion of whom are Russian, and yesterday Anton Silluanov, the Russian finance minister, threatened to withdraw financial aid - via restructuring an outstanding €2.5 billion loan- after being left out of talks.
According to the BBC, Russian banks alone had placed $12 billion in Cypriot banks at the end of 2012, with corporate deposits at $19 billion. These figures grow larger when savings from across the other former Soviet Union Republics (Ukraine, Kazakhstan, etc.) are taken into account.
Some analysts have raised the intriguing and alarming prospect that Russia could threaten Germany's gas supply if the bailout is not dramatically reshaped. Gazprom reduced gas supplies to Europe in 2009 during a dispute with an Ukrainian energy company. Europe relies on Russia for 36 percent of its gas supply, a dependency we may hear more about in the coming days.
The two largest Cypriot banks could see their liquidity cut off, leading them to become insolvent and collapsing – putting their €30 billion of deposits at risk, since the government obviously cannot guarantee them. This would likely bring down most if not the entire Cypriot financial system.
Cyprus central bank chief, Panicos Demetriades, has warned parliament that the island's banks will lose 10 percent of their deposit base within days if the draft bill passes, and urged it to consider extending the levy-free rate all the way up to €100,000. He also said the measures in the draft legislation will fail to raise the €5.8bn required to supplement the troika's €10 billion bailout.
With the financial sector close to or in the process of collapsing, and no support forthcoming from the eurozone or ECB since Cyprus rejected their terms, Cyprus could even be forced to leave the eurozone and begin printing its own new currency, one that would have little international trust and could lead to a spiral of hyperinflation.
The Cypriot government will run out of cash at the start of June when it needs to pay off a €1.4 billion bond, while the banks' position could be worsened by the likely deposit outflows once banks open, even if the tax is not applied.
Cypriot government has submitted he latest draft bill to parliament setting a zero percent levy on deposits of up to €20,000 euros, a 6.75 percent rate for amounts between €20,000 and €100,000 euros and maintains a 9.9 percent tax on all deposits above that level.
Banks in Cyprus are closed but the ATMs are functioning normally.