Cyprus bailout problem not yet over

“Don’t be surprised if European ambassadors soon take refuge in northern Cyprus,” Member of European Parliament Ozan Ceyhun tweeted the evening of March 18, moments after a Greek Cypriot mob entered the garden of the Federal German Embassy in the Greek Cypriot quarter of Nicosia and stole the German flag. Greek Cypriot police intervened, the mob was dispersed (no water cannons or gas used on demonstrators) and the recovered flag was presented back to the German embassy. Yet, the development showed the growing anger among Greek Cypriots against Germany, which is being considered the architect of the planned up to 9.9 percent “stability levy” – which in fact will be a wealth tax – on bank deposits.

Amid mounting problems and failure to find the required 29-vote majority in the 56-seat House, President Nikos Anastasiades postponed the vote on the controversial 10 billion-euro bailout accord he had agreed with the EU, the IMF and the European Central Bank on March 16. Under that accord the Greek Cypriots were to introduce a levy of 9.9 percent on accounts more than 100,000 euros and a lesser 6.75 percent on accounts lower than that benchmark. The House was to vote yesterday on an amended bill under which deposits up to 20,000 euros would be exempt from levy while there would be a 6.75 percent levy on deposits in between 20,000 and 100,000 euros and a rather high 9.9 percent levy on deposits higher than 100,000 euros. For a second time the vote was postponed yesterday, and banks were ordered to remain closed until March 21.

Irrespective of the outcome of yesterday evening’s vote, however, even Greek Cypriot central bankers were cautioning that the bailout problem would not be over as with the revised levy it would be impossible for the Anastasiades government to collect the targeted 5.8 billion euros, a key component of the 10 billion-euro bailout plan.

Furthermore most of the 100,000-euro-or-more accounts at Greek Cypriot banks belong to “Russian investors” – or businessmen or politicians using Cyprus to launder their money. Indeed, was it not because of the estimated $19 billion or more Russian deposits in Greek Cypriot banks that Tsar Vladimir Putin has been after acquiring Laiki Bank for some time? Was it not because of such intimate affairs between Greek Cypriots and Russians that news of the Cyprus bailout plan and the “stability levy” created more nervousness in Russian stocks than elsewhere, including Cyprus? Plus, there is the issue of the alternate Russian plan for Cyprus that could best be summarized as a “base for money.” The claimed Russian “base for money” move, which so far has been confirmed only by Greek Cypriot sources, might have meanings beyond Cyprus as well, as it might signal Moscow’s giving up its key Mediterranean ally, the Bashar al-Assad regime in Syria, where it has a huge naval base.

Last but definitely not least, it is indeed difficult to understand why the European leaders have singled out the tiny Cyprus republic for this “Brave New World” of bailouts. Is it because of its reputation for money laundering, much of it Russian money? Yet, would the Spanish, Italian, Portuguese or French depositors not think about what they would do if a similar wealth tax were imposed on them?

Whatever might be the result of last evening’s vote at the Greek Cypriot House of Representatives, the bailout problem is far from being resolved and perhaps EU envoys should keep their luggage prepared for the worst scenario.