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Cyprus is facing imminent collapse of its banking sector if an accord cannot be struck to save the financially troubled island nation. Cyprus is struggling to come up with a new plan before Thursday 3/21- the day that the bank holiday ends. If a deal is not reached by Thursday, the Finance Ministry will order banks to remain closed until next Tuesday. The idea behind this is to prevent a run on banks from happening.
A run on banks, is however, even more likely because of the way the negotiations to reach a deal began. The initial plan was to take a tax on deposit accounts across the board- sparing those with funds under a certain amount, causing mass outrage. Cyprus is looking to Russia for help and Russiaindeed has a vested interest in helping the ailing country. The article states that Russians have about $30 billion on deposit in Cypriot banks. Such a proposed tax would have a grave effect not just on Cypriots but on the Russian people as well.
This morning, Wednesday, the minister of finance of Cyprus, Mr. Sarris met with Russia’s minister of finance and later with the Russian deputy prime minister. Mr. Sarris has said “We will stay here until we reach some agreement,”.
Various alternative solutions that have been brought up include tapping the national pension fund or issuing new debt. The church of Cyprus has even proposed collateralizing its many property holdings, against which the state could issue a new round of sovereign bonds to raise funds. The article points out that the church is a huge stakeholder in Cyprus’s biggest banks, including Hellenic Bank- Cyprus’s third-largest bank and Bank of Cyprus, its largest bank.
How did Cyprus’s banking system get to this precarious state? Unfortunately, they were greatly impacted by the severe recession in Greece. Cyprusissued many loans to Greek businesses that have since failed and racked up huge losses as a result. They have also been hit with losses from Greek debt holdings, purchased when interest rates made the investment attractive.
Cypriots are outraged by the state of affairs and especially so at the initially proposed deposit tax- should they really be the ones paying for the bank’s mistakes? I will continue to watch this situation in the ensuing days to see where we go from here.
I thought this was an interesting developing considering all the news we've been hearing from Greece. I think that their government officials made a grave mistake is trying to tax bank accounts. This is now going to be significant distrust in the government. When these organizations open I think we can say with almost 100% certainty there will be a run on the banks. You'll see citizens hording the cash in their houses, Russian as well as other international investors will probably want to take their money out of the country all of which will lead to even more devastating effects on their economy. Now that officials have brought this idea of taxing accounts open to the public I think they will have a massive problem on their hands.
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