Cyprus crisis...EU out of options?

The surprise and shocking announcement at the weekend of the Cypriot Government’s decision to apply two layers of one-off tax to savers’ funds has many layers of meaning. The tax decision will see savers with under €100,000 hit with a 6.75% levy whilst those with over €100,000 will face a 9.9% charge. Unsurprisingly there has now been a run on the banks whilst savers (forlornly) try to get their own cash out before the surcharge was applied. The levy was made necessary as the European Union and International Monetary Fund stepped in to bail out the national economy but only if the balance of the needed money was found elsewhere.

It seems the real impetus for this move came from Europe with fingers being pointed towards Berlin. The Cyprus government is a coalition and could never have hoped to carry this directly and the reason for the needed bailout is decreasing governmental finances and high levels of bank debt from recent property booms and links to the Greek crisis from lending. The banks are tapped out and the only organisation that could help recapitalise them, the Cyprus government, is too. The result? EU bailout...

Most worrying however, when looking at the bigger European picture, is that this move smacks of desperation with many commentators fearing this shows the EU is out of ideas on how best to avoid a bigger financial meltdown that would incorporate more countries and I do think they are right.

The EU brass have probably booted the idea of a ‘savers’ tax’ around many shadowy boardrooms but then had to cast it aside knowing that it would never work unless it could be tried first in a small test case to see what happens. Cyprus may well be a victim of their size - they would never try this in Spain or Portugal but a small island nation on the geographical edge of the Euro zone is ideal. The country also apparently has a number of wealthy foreign ‘investors’ whose income came from less than clear sources - an ideal faceless demographic to hit with a big surcharge.

The scary thing is if the bailout fails then many believe this could be the spark to cause a much bigger EU collapse - the nuclear refinancing option seen to publicly fail - and savers' security and confidence in tatters. But if it succeeds, many governments may well bring this move to the front page of their playbook for avoiding new recessions. And what would stop them coming back to the well in future? What will savers in countries outside Cyprus think? Probably ‘where is my money safest?’ and the answer might well be ‘fewer places than before’...