It is difficult to assess the quality of the proposed bailout plan for Cyprus given its suddenness and the lack of background information.
What is known is that the EU, with the agreement of the Cypriot government, are proposing a haircut of bank deposits for the total amount of 5.8 billion Euros, whereby deposits below 100.000 Euros would be taxed by around 7 per cent and those above 100.000 Euros by around 10 per cent. In return, Cyprus would receive a financial aid for its banks of the order of 10 billion Euros.
The list of the unknowns is longer:
- How do small savers compare to big savers in terms of absolute numbers and also in terms of their deposit contributions? This is important in order to establish the deal’s fairness.
- What is the role and contribution of corporate investors as compared to ordinary investors?
- How will the proposed deal impact on future conditions imposed on deposits (including of foreign and corporate investors) in the medium- and long-term?
- How does the deal impact on proposed salary cuts of public sector employees?
- What guarantees have been provided that these measures are non-recurring?
The official story is that the Cyprus government has opted for this solution in order to avoid worse, whereby the details of the worse-case scenario are also fuzzy and not very credible considering that, first, Cyprus is a member of the EU and has Euro as its currency and second, the bailout plan is small as compared to those implemented for Greece, Spain and Ireland.
According to Moody’s, as reported in the New York Times, European Union officials are pursuing other policy goals. But what might these be? Is this their way of forcing Cyprus to reform its banking sector—or perhaps the way to avoid insisting on this? Could this be meant to scare bigger countries such as Italy and Spain into accepting reforms so as to avoid the ‘Cyprus fate?’
Under certain circumstances the proposed bailout plan may represent a good way forward, at least for Cyprus. But at this point this is impossible to say. EU and Cypriot politicians are well-advised to reconsider both their conceptual and communication strategies.