Wednesday, April 3, 2013

“C” is for Cyprus and its Financial Downfall

Cyprus is the third-largest island in the Mediterranean, after Sicily and Sardinia, and is located near Turkey and Syria. The country has been under the rule of many countries during its existence, but became an independent nation in 1960, after 35 years as a British colony. Since then, internal strife between Greek Cypriots and Turkish Cypriots has been the order of the day, and had been a major factor in keeping Cyprus out of the EU. All attempts at reunification failed, and Greek Cyprus alone was allowed to enter into the EU. The leader of the pro-independence National Unity Party, Dervis Eroglu, won the presidential election of Northern Cyprus in 2010, while Dimitris Christofias has been president of Greek Cyprus since 2008.

Up until recently, Cyprus was considered an important offshore banking center. However, a recent financial crisis in the country has resulted in a definite down surge in its economy and the probable death of its status as a banking center.

The EU has established a “rescue plan” for Cyprus, which includes adding an additional tax on all bank deposits; although the exact percentage is still basically under discussion, most Cypriot nationals are less than enthused at having to pay this tax, claiming that the rate is too high for those with smaller deposits and too low for those in the higher deposit brackets. Regardless, it has been determined that the island must meet certain financial obligations in order to receive a “bail-out” from the EU; since it must obtain the quota in some manner, the tax must therefore be applied.

In the meantime, the Cyprian banks went on strike as a protest against the rigid measures that have been announced. The strike not only included closing its physical doors to all operations except ATM, but the strike was also extended to all financial transactions outside of Cyprus, including online and ATM services. This created serious problems for all account holders, both resident and non-resident. In fact, non-residents had absolutely o access at all to their funds, while internal ATM service was limited at best, with blocks-long lines.

This morning, 3 April 2013, the EU agreed to a 10 billion euro loan to Cyprus, under set conditions: Cyprus has agreed to apply the one-time tax on deposits over 100,000 euros, while those below that mark will be exempt. The Russian government has criticized the UE’s decision, calling them hypocritical and saying that the decision shows a distinct lack of values, especially in light of the UE’s statement about having lofty ideals. The decision could have political ramifications for the European Union itself.

The decision could possibly have a heavy negative impact on the banking industry  in the country, as it is predicted that many account holders will transfer their funds to banks in other offshore jurisdictions.

Was the bail-out a good move? Only time will tell, but it’s probable that while it may remove an immediate pressure from Cyprus’s internal financial crisis, the long-term results will be less than satisfactory for the banking industry in Cyprus, as people begin withdrawing their funds and transferring them to other, safer locations. As Russia’s statement indicates, there is already strife in the EU because of this action, and the word that is going about is that the euro itself has a bleaker outlook for the future.