By Patrick Corby
International lenders agreed on a €10bn ($13Bn) loan to Cyprus on Saturday morning, €5.8Bn of which is negotiated as being seized from Cypriot bank deposits, an unprecedented arrangement in any of the four such Eurozone loans.
The deposit seizure by the Cypriot government has already been initiated on the orders of Michalis Sarris, the Cypriot Finance Minister, with no cash withdrawals being enabled until Tuesday 19th March when the government will impose the immediate tax.
Mr Sarris has stated: “I am not happy with this outcome in the sense that I wish I was not the minister that had to do this”.
The collection of bank deposits will come as a 6.75% tax on banks accounts with deposits under €100,000 and a tax of 9.9% over this level.
The settlement deal, which started at 5pm on 15th March, was negotiated over ten hours in Brussels with European international lenders and reported to the public by Dutch Finance Minister Jeroen Dijsselbloem on Saturday.
On hearing the news masses of Cypriots rushed to their savings. “I tried to transfer cash online as soon as I heard the news, but the account had already been blocked,” said Christos Pappas, a financial services worker in Cyprus.
After fearful account-holders had emptied ATM machines, crowds gathered outside closed Cyprus co-operative banks, normally open on Saturdays, said Erotokritos Chlorakiotis, general manager of the Cooperative Central Bank.
Apart from Cypriots being stripped of their savings, international depositors such as British, Russian (which hold $40 billion in Cypriot accounts originated from Russia) and Greek account holders are also hesitant to keep their holdings in a system where public money is being directly seized.
Cyprus’s economy contributes 0.5% to the overall Global Domestic Product (GDP) of Europe, which is the main cause of the untraditional deal. The decision allows for a direct tax on the Cypriot public instead of an indirect tax, through monetary printing, spread across the whole of Europe and concentrated in Germany.
Negotiations included that Cyprus enacted 4.5% annual budget cut relative to its GDP that would take Cypriot’s overall debt level to a smaller 100% of GDP by 2020.
This case highlights the problem with government spending: that sooner or later debt must be paid. So far, countries have been paying present debt with future income and moving liabilities around. As these options run out, government debts will have to be paid in a more traditional manner, through taxing its citizens.
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