Guest writer Ronnie Smith looks at the crisis in Cyprus and its international connections, as well as at the tax levied on bank deposits, which will also influence the Romanians who have money in Cypriot banks – Romania-Insider.com wrote about it here.

For whatever reason, the banking system on the island of Cyprus is on the verge of collapse. In spite of the very small size of the Cypriot economy in general, the banking sector there is very significant with large overseas deposits, notably from Russia, and its destruction would have a major impact on the world economy at a time of global uncertainty.

The Cypriot government and banks have asked for a bailout from the usual sources – the EU and the IMF – and a relatively small loan package has been negotiated. However, unusual conditions have been attached to the agreement and Cyprus has to provide a proportion of the recapitalization funding from its own resources, not easy as the island is essentially broke.
This harsh condition has been imposed under rather unusual circumstances. Most of the loan will come from German sources and there is a general election due in Germany later this year, in which Mrs Angela Merkel’s governing coalition is seen to be under threat. German voters are thought to be fed-up with lending money to careless Greek governments and may have particular problems with the idea of giving more money to Cyprus when the main beneficiaries are believed to be shady Russian oligarch’s and mafia bosses. It is therefore thought that some kind of Cypriot contribution to the bail-out would help Germans agree to it without endangering Mrs Merkel’s electoral fortunes.

Within the political and financial elites of Europe, the possible fall of Mrs Merkel’s government is considered a catastrophe that must be avoided at all costs.

Consequently the Cypriot government is proposing to introduce a one-off tax take from all bank accounts in Cyprus including those of private citizens below the normal threshold of 100,000 Euros. This in itself is unprecedented but the means by which the government has sought to implement this raid on personal savings is, frankly, astonishing.

The banks and all the ATMs on the Greek part of the island have been closed since last Friday and will not reopen until Thursday. Access to bank accounts has been denied in order to ensure that people and companies do not withdraw their money before the government’s tax proposal is accepted by Parliament, in a debate that will take place at 18:00 this evening. Then the money will be withdrawn through the bank accounts.

This is obviously drastic action imposed on a population by their government that appears to break every rule and law governing banking practice and the limits of government action in a modern democracy. Even more importantly it questions the very basis of everyone’s understanding of what it means to put money in a bank. It is supposed to be safe and untouchable there. We are supposed to be able to have access to our money whenever we want and we are supposed to earn interest from the bank in respect of our allowing the bank to use our contribution to its capital reserves in order to invest and make our money grow.
What is likely to happen on Thursday when the Cypriot banks open? How much money will immediately be withdrawn by angry people who no longer trust their banking system? How can Cypriot banks survive once all the normal capital from savings accounts has been lost for the sake of securing a loan to the value of a much smaller amount?

And, what is going to happen in Greece, Portugal, Spain and Italy when the people in these financially stressed countries see the EU conspiring with governments to virtually steal money from private savings accounts perhaps simply to keep Mrs Merkel in power?

These are very dangerous times for Europe’s financial and political systems in this continually amazing financial crisis.

By Ronnie Smith, Guest Writer