The dramatic conclusion to a story that has captivated the world, in much the same way that the T-rex in Jurassic Park “captivated” that lawyer right before devouring him on the toilet:
Lawmakers in Cyprus on Tuesday rejected a bailout plan that would have rescued the country’s banks but forced savers to chip in for the cost, throwing down a gauntlet to the rest of Europe over the financial fate of the tiny island nation.
The plan to save Cyprus’s collapsing banks but to charge depositors for the service proved so controversial that not one of the 56 members of Cyprus’s parliament voted for it Tuesday evening. The rejection leaves the fate of rescue plans up in the air, with other European leaders so far unwilling to step in to save Cyprus, where bank deposits tower over the rest of the economy.
Parliamentarians “feel and they think that it’s unjust,” Cypriot President Nicos Anastasiades told reporters Tuesday.
That’s from the Washington Post, which reports that victory for the bank account holders of Cyprus (or, more to the point, the holders of Cypriot bank accounts, many of whom are foreigners) could spell doom for the entire European Union:
The fate of the 17-nation currency union, meanwhile, again hangs in the balance, threatened by a country that constitutes just 0.2 percent of the zone’s collective economy. Throughout the crisis, European policymakers have tried to keep any country from leaving the euro. Losing a member nation would pose uncertain risks to the world financial system and be politically embarrassing to the major powers such as Germany and France that designed the currency union.
Overall, Cyprus needs about $20 billion — an amount equal to its annual economic output and a sum that, if all borrowed, would throw the country’s finances onto unsustainable footing. The IMF’s internal rules do not allow the fund to make loans to the country under those circumstances. Euro-zone countries are hesitant to lend the full amount, as well.
In a sad irony, one result of the fiscal crisis in Cyprus could be the complete collapse of its enormous banking system. The Brits are so worried about this that they’re flying a planeload of Euros over, to make sure troops stationed in Cyprus have money.
Part of the rationale behind the Great Bank Heist was to grab money from foreigners, who have a ton of money in Cypriot banks, but are otherwise largely invulnerable to taxation by its government. It proved impossible to micro-target these foreign depositors, many of whom are strongly suspected of being Russian gangsters. I gather either EU or Cypriot banking laws prevented them from simply declaring that every foreign depositor had to pay a special levy, but domestic bank customers did not. (And even if that were legal, it would shatter international confidence in Cypriot banks even worse than the unilateral levy, reducing the island nation to the status of banana republic.)
The effort to make the bank seizure more “progressive” by exempting the first 20,000 euros of income would have pushed the burden more heavily onto rich foreigners and left the Cypriot working stiff with no “skin in the game,” but it would also have produced far less total revenue than the Cyprus bailout plan from the European Union required. It’s usually not that hard to make the Little Guy sit still for a “haircut” if he thinks Big Guys are getting screwed worse than he is – that’s one of the core operational principles of socialism – but in this case, the Cypriot peasants were apparently unwilling to take the bait. Perhaps the knowledge that their island’s crucial banking sector was imperiled was a motivating factor. A lot of people work in those banks; how many jobs would be lost, once everyone in the world with serious money realized it was foolish to make deposits there? Wonder of wonders, the literal definition of “fairness” seems to have trumped the socialist re-definition of the term.
And any exemption less than 100,000 euros would have still destroyed the integrity of deposit insurance, which was a major worry across the EU and beyond. Confidence that this seizure of assets would be a one-time emergency measure, repeated nowhere else in world, was shaky.
What’s next for Cyprus? Reuters reports that efforts to secure a bailout from Russia instead of the EU are under way, possibly in exchange for access to offshore natural gas reserves. The EU is nervous about a bailout that isn’t matched by big revenue from the government of Cyprus; taxypayers in the healthier European states are understandably weary of such bailouts. This is the first time a national legislature has flatly rejected the terms of an EU rescue plan – it might get them booted out of the Union, and whether they stay or go, it may trigger a cascade of behaviors in the other sickly European states that blows the entire Union apart.
Cypriot legislators are now working on a “Plan B” that would scrape together the cash they need to satisfy the EU by… nationalizing the pension funds of semi-government corporations, where they can swap I.O.U.s for 3 billion Euros in fast money. These semi-government organizations (or “state-owned enterprises,” as the U.S State Department calls them) are pretty important in Cyprus. They dominate the energy sector, and apparently employ a sizable chunk of the Cypriot workforce, numbering in the tens of thousands. I don’t imagine those folks would be happy to find their pension funds drained of cash.