Cyprus, Suddenly Relevant

For the next several weeks, I’m going to be doing a spotlight series where I talk about different countries and the problems they are currently facing. I may do several other articles to break it up and add some variety, but for the most part this is what I’m going to be focusing on for the next little while.

Fifteen articles. Fifteen countries. Fifteen problems.

I’m a big fan of increased global awareness so hopefully you’ll be able to take something from these articles.

First stop, Cyprus.

As rich and interesting Cypriote history can be, Cyprus has largely been a footnote on the global stage. A country more known for its deep Greek and Turkish divide, the last time Cyprus was headlining the news was when Cypriote football club APOEL reached the Champions League Quarter-Finals against Spanish giants Real Madrid. Cyprus has returned to prominence this time as the latest country to be affected by the Eurozone crisis.

Boasting an incredibly strong banking sector for a country with barely over a million people, Cypriote banks took a large hit when Greece went bankrupt. The Cypriote banking sector is more than five times the size of the country’s GDP and public debt could hit 100% of GDP by the end of this decade. The Bank of Cyprus and the government itself needed bailout money to the tune of €10 billion ($13,200,000,000 CAD).

The problem with receiving bailout money is the strict economic measures that always come with it. Not only would Cyprus have to increase their corporate tax rate from 10%, the lowest rate in the EU and a rate that has made Cyprus an incredibly attractive investment for global corporations, to 12.5% which would put it on par with Ireland. They would also have to do something that is basically unheard of in Europe.

Every bank account holder in Cyprus, which includes residents and non-residents, would be required to pay a one-time tax on their existing deposits. There would be a 9.9% rate for accounts with more than €100,000 ($133,000 CAD) and a 6.75% lower rate for those with smaller accounts.

While it can be argued that the rates are low enough that it shouldn’t be too big a deal, this is still a drastic measure. Account holders would be directly funding the bailout for the government and banks from their own pockets and life savings. Understandably, this has sparked an incredible outcry in Cyprus and the rest of Europe, as many other financially unstable nations look on in fear that this may become the standard for future bailout measures.

There already is a large feeling of resentment in Europe towards banks and how taxpayers had to pay for their bailout with increased taxes and through austerity measures and this does little to stem the tide.

In a move that does little more than to add more fuel to the fire, Cypriote banks have blocked people from being able to withdraw large sums of money from their accounts and the government is extending the Monday bank holiday until Thursday. These are people’s life savings and own money that they are not being allowed to do with as they wish because it has to go towards paying for the government.

The hardest hit by this levy will be the people who don’t have much, who managed to scrape by and a save a little nest egg for themselves. These are the people who have taken to the streets in frustrated protest.

While Nicos Anastassiades, the Cypriote president, is willing to lower the rate being levied for small accounts, he is refusing to increase the rate for larger accounts, for reasons pointed out here. There is a lot of Russian money sitting in Cypriote banks and Cyprus has long been known as a safe haven for foreign investors.

If this measure goes through, it sets an incredibly harsh precedent not just for other European nations but for the rest of the world as well. German Chancellor Angela Merkel said the measures are to “make the people responsible pay for the situation”.

Except that’s not really true is it.

What this will end up encouraging is people not wanting to keep their money saved in banks. People will turn to cash and gold as a means to save their money out of fear that it could be taken to pay for irresponsible government spending. With less people having money invested in banks, financial institutions will have to offer higher rates in order to tempt people back in.

Its an incredibly short sighted policy and its effects are going to be felt for years to come.

Next stop: North Korea