It's unavoidable. You will hear a lot about Cyprus over the next few days. The island nation is considering bailing out its banks with the help of a onetime depositor levy — an event that many paranoid onlookers fear could spark a European financial panic and destabilize the entire region. (Don't worry, you don't have to understand that sentence yet.)
Even if you, like most Americans, have no idea where Cyprus is or why anyone would care what goes on there, the fact remains that if you want to be a civilized person with a reasonably good grasp of major world events, you should know what the hell is happening. So we're here to help, with an Absolute Moron's Guide to the situation in Cyprus.
Hello again. So tell me, what's Cypress Hill up to these days? It's been a while since that "insane in the men's brain" song.
It was "insane in the membrane." But we're not here to talk about Cypress Hill. We're talking about Cyprus. It's an island nation off the southern coast of Turkey.
Ah, yes, Cyprus: the third-largest island in the Mediterranean, with a Greek-speaking population of 1.1 million. Sovereign state since 1960, tenuous power-sharing arrangement between Greek Cypriots and Turkish nationals, calling code 357, capital called Nicosia?
Wow, I'm impressed. Wikipedia?
Anyway, Cyprus (whose citizens are called Cypriots) is a medium-size island with a very fragile economy. It's part of the European Union, and its banks had a lot of Greek debt. When Greece underwent its financial crisis and wrote down the value of its debt, Cypriot banks lost a ton of money.
Why does Cyprus need banks? Can't they just stuff their money into an old Pringles can like I do?
No. Because Cyprus is a big banking center for Russian oligarchs and mafia guys, who use it as a tax shelter and money-laundering site. As a result, Cyprus has a lot of Russian money in it — some estimates say that nearly a third of all deposits in Cypriot banks are from Russian nationals.
So, okay, Greece blows up. Banks in Cyprus, which are filled with sketchy Russian money, are in trouble because they're closely tied to Greece. What's the news here?
Well, over the weekend, a group of European finance ministers proposed a plan to bail out the banks of Cyprus with a $13 billion emergency assistance package. But the plan is very unorthodox and controversial. Instead of implementing new taxes or getting money from abroad, the government wants to raise $7.5 billion through a onetime tax on Cypriot bank depositors.
So, if I'm from Cyprus, and I have money in the bank from mowing lawns last summer, the government is just going to ... take it?
Yep. Under the most recent terms discussed, all bank depositors with over 100,000 Euros (or about $130,000) would get 9.9 percent immediately deducted from their accounts, and smaller deposits would get a 6.75 percent deduction. They'll get shares in the Cypriot banks in return. The plan is being called a "one-off upfront stability levy." But really, it's just a tax.
Say you're a Cypriot fisherman with $10,000 in life savings in the bank. When the banks open up this week, the government will immediately take $675 of that away.
That seems τρελός.
It's Greek for crazy. What up, Google Translate!
Oh. Anyway, it is crazy. Insured bank deposits are almost never subjected to mandatory cuts like these. Money kept in government-guaranteed savings accounts is supposed to be completely safe, no matter how screwed up your government's finances are.
I imagine ordinary, non-rich Cypriots aren't totally pumped about this.
Correct. They are protesting in front of the presidential palace, and the parliamentary vote has been postponed until tomorrow. Cypriot leaders are already discussing ways to make the tax more palatable by reducing the share paid by small depositors and increasing the portion paid by large depositors — effectively, taxing the rich more.
But wouldn't that make the Russian mafia dudes mad, and then they'll go all postal like in that scene from Boondock Saints?
Um, probably not.
Oh. So, why does any of this matter to me? Can I go back to playing Fruit Ninja?
It matters because lots of people are scared that the situation in Cyprus will spread — that Cypriots will take their money out of the bank en masse, which will cause people in Italy, Spain, Portugal, and other troubled EU countries to fear for the safety of their deposits as well, and start bank runs in their countries. That could lead to a continentwide financial crisis, and the fallout could hit markets in the U.S. As we saw during the last EU crisis, what happens in Europe doesn't stay in Europe for very long.
Guess I'm canceling that Ibiza spring break trip after all.
You might want to hold off on that, because that worst-case scenario of a mass run on European banks is not very likely to happen. Cyprus is different from almost any other country in Europe — because of the Russian dudes, and the size of its banking sector relative to its economy. And there are very specific reasons that this kind of depositor tax will be contained to Cyprus and not implemented anywhere else.
No offense, but are there any people smarter than you with opinions on this stuff?
Lots. Joe Weisenthal wrote that in the Cyprus situation, "the obvious avenues of contagion are not present," and he's pretty smart. Joseph Cotterill at FT Alphaville writes that "the immediate systemic danger is nil," but warns that the fact that the Cyprus situation could happen at all "says something dark about Europe’s long-term future."
Great! So I will continue to look down on Europeans and their tight pants and silly accents, and not worry too much about their financial problems.
That's not really the point of this exercise.
LOL, okay, Mister Economics. Back to Geektown for you!