Early this morning in Cyprus, the government announced an agreement with the IMF and the European Union on a bailout that it had long sought. Rather than €17 billion, the outside lenders provided only €10 billion.
The remainder, it was decided, would come largely from a one-time forced reallocation of deposits from the banks to the government. Those with deposits over €100,000 would have 9.9% of their deposit taken away, replaced by equity in the bank. (Hint: If the banks were well off enough for that equity stake to have value, Cyprus wouldn't need a bailout.)
Now, most of those deposits are from foreign sources, largely Russian, who find Cypriot banking laws pretty lax. There are estimates that Russian corporations had around €20 billion on deposit, and a 10% hit to their deposits might be accepted as a cost of doing business.
However, the agreement also taxed those deposits below €100,000 at a 6.75% rate. This will include many citizens who believed their deposits were insured. I guess they weren't insured for government failure, just bank failure.
It doesn't take too much to suppose that the consideration was whether the government could still have its banking system if they whacked the large deposits at a higher rate and spared their citizens. That they didn't speaks volumes of the degree to which these programs protect banking interests rather than everyday people.
Naturally, people started going to the ATMs to get their money out of the banks before Tuesday (banks are closed Monday for a national holiday.) The ATMs, though, were already refusing withdrawal requests. I read one report that you could deposit on the machines, however.
A great deal of anxiety and anger has resulted. The local press is reporting that the Germans and the IMF had agreed that Cyprus was small enough to fail. There was also a condition in the bailout that the banking system, which holds assets 7 times the size of the country's GDP, needed to shrink to European norms over the next few years.
This "unique stability levy" imposed on depositors -- that's what the official document calls it -- is not causing stability in Cyprus, and it is causing consternation elsewhere. It will be interesting to observe depositor behavior in places like Lisbon and Athens Monday morning. Would they feel safe now that this is a situation unique to Cyprus? It is remarkable that a continent that has thrown nearly a trillion euros at banking problems over the last three years would take such a risk to its banking system over a few billion more. On the other hand, if it turns out that you can impose costs on creditors this way in Cyprus, you might find out that you can do something more than just stick it to taxpayers or beg the Germans for help.