Cyprus & Australia

What is happening in Cyprus is something that we must watch and see how the repercussions could fan out to our own economy.

The details of the events in Cyprus are as follows. The assets of the country's banking system are between five and eight times the size of its GDP. It's alleged that a great deal of the assets in the banking system belong to Russian oligarchs and global tax dodgers. Nonetheless, Cyprus was in need of a bailout.

--Instead, it got a hold up. Savers with guaranteed deposits in the banking system were assessed a 'stability levy' over the weekend. Depositors with over €100,000 in the bank will be taxed 9.9% of their savings. If you have under €100,00, it's a 6.75% tax. This 'up-front' and 'one-off' levy on insured accounts will raise an estimated $5.8 billion of bailout funds from bank depositors. The remainder of the money will come from the International Monetary Fund (IMF) and the European Central Bank (ECB) in the form of loans.

--The IMF said it didn't want to commit to a larger loan because then it would leave Cyprus with an unbearable government-debt-to-GDP ratio for such a small country (since when has that mattered in Europe?!). The result is that creditors to Cyprus will be paid in full at the expense of savers. 

--Now in the scheme of things, the bailout amounts are small beer. Spain got bailed out for $41 billion, Portugal for $78 billion, Ireland for $85 billion, and Greece for $380 billion. By comparison, the situation in Cyprus is urgent but not terribly important, at least in terms of monetary amounts (and assuming you aren't one of the people who just had your savings confiscated).

--But the precedent established by the ECB's decision is what's important here. Guaranteed deposits will simply be confiscated to pay off bond-holders. ECB and EU officials had the bad taste to defend this on grounds of progressive social justice. They have claimed that since it is Cyprus being 'saved', all of Cyprus must pay

What does this say to the everyday person who may have some small savings or first home buyers saving for that deposit, can this happen here if the economy, even with its resouces boom, starts to slide into unwanted territory