Tiny Cyprus rattles global markets

A proposal to tax Cypriot bank accounts in order to secure a bailout has prompted outrage and may be short-lived.

By Charley Blaine Mar 18, 2013 1:43PM
Updated: 4:29 p.m. ET

Who would have thought that the 160th most populous country in the world would have caused a near global panic.

That's the oddity of Cyprus, whose banking system was in disarray on Monday after the government agreed to tax the savings accounts of Cyprus' outsized banks in order to get a 10-billion euro bailout (roughly $12.9 billion) from the European Central Bank, the International Monetary Fund and the European Commission.

How much of a tax -- if any -- will be imposed is unclear because Cyprus' parliament refused to ratify the deal. And Cypriots were outraged.

Global markets were unnerved. Stocks in Asia and Europe tumbled. The Dow Jones industrials ($INDU) fell as many as 110 points early in the day. The blue-chip index was briefly positive in the afternoon before sliding 62 points to 14,452, its first two-day loss since Feb. 21-21.

And the Russians were spitting mad.

Yes, you read correctly. The Russians. Seems that Russian oligarchs have used banks on Cyprus to park their cash, ill-gotten or otherwise. As a result, the Cypriot banks have assets eight times larger than the island nation's gross domestic product of some $23.6 billion.  © Kick Images, Photodisc, Getty Images

Russians keep about $19 billion in deposits in Cyprus, mainly through companies they set up there, The Associated Press said. Russian banks also had around $12 billion placed with Cypriot banks at the end of last year and have loaned about $40 billion to Cypriot companies of Russian origin.

In addition, The Associated Press said, some $49 billion was wired out of Russia illegally in 2012, much of it to Cyprus.  The interest in Cyprus is lax  banking laws that allow money to flow in and out without much examination and well beyond the reach of Russian officialdom.

Cyprus really is a small country. Its population is smaller than the Bronx in New York. Its economy, as Business Insider helpfully noted, is a little smaller than than that of Shreveport, La.,

Cyprus was having a debt crisis that, if left alone, could lead to a default on its sovereign' debt and the collapse of its two largest banks. For reasons that mystify, the original proposal was for the first 100,000 euros (about $129,500) of savings to be subject to an immediate 6.7% tax. Anything above 100,000 euros would be taxed at 9.9%.

But demanding bank depositors to share in the costs of financing a bailout is unprecedented. The tax is "a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future," Joachim Fels, chief international economist at Morgan Stanley in London, wrote in a client note.

The proposal basically crashed as everyone on the island in the eastern Mediterranean headed to their nearest ATM to get their cash out before the tax could be imposed. The Cypriot government was scrambling around Monday for a new idea.

That caused money managers around the world to worry that bank runs on Cyprus would leave to bank runs in Greece, Italy and Spain on Monday. The fears appear unfounded. There were no lines outside banks of customers wanting their money.

Ratification votes on the proposal were postponed on Sunday and again on Monday. Cyprus ordered its banks closed until Thursday.

The episode dismayed a great many people, including Russian President Vladimir Putin, whose official spokesman called the plan "unjust, unprofessional and dangerous."

The Economist magazine said the idea was bad for three reasons:
  • Regardless of whether there were depositors lining up outside banks in Greece or Italy, it does the raise the risk the depositors are right to worry.
  • Second, "There is no moral imperative for whacking Cypriot widows and leaving senior bank bondholders untouched," the magazine said.
  • The deal "has no coherence in the larger context," the article said. European worries have calmed down. But while the ECB's price for help is to go into an austerity program, this plan suggests the ECB isn't as strong as people have thought.
Since everyone has gone back to the drawing board, this could prove to be a crisis with a short life as Marketwatch's Mark Hulbert opined on Monday.

But it also shines a light on something else. The stock market is jittery with the Dow sporting record levels and the Standard & Poor's 500 Index ($INX) flirting with the new highs. The S&P 500 ended Monday 13 points below its all-time closing high of 1,565.15.

In fact, the markets are a bit overvalued and may well be ready for the long-expected pullback of 5% to 7%.

Gold (-GC) jumped $12 to $1,604.60 an ounce. But crude oil (-CL) added 29 cents to $93.74 in New York. The U.S. dollar moved higher against the euro. The 10-year Treasury yield fell to $1.956% from 1.996% on Friday.

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25Comments
Mar 18, 2013 2:45PM
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Socialism's fun until you run out of other people's money!

 

The FED's been taking 4-5% a year from US depositors and filling up US banks too.

 

Mar 18, 2013 3:45PM
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What the Cypriot bankers are doing to their depositors is not "taxation," it's called "confiscation." CNBC you are lousy at facts and news, great at propaganda and lying.

Mar 18, 2013 3:28PM
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Hope Obama isn't paying attention or we will be subject to this kind of a socialistic money grab. They are already licking their chops like foxes circling the hen house when they look at our retirement nest eggs we scrimped sacrificed and saved for.
Mar 18, 2013 4:17PM
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How does a country with an economy "a little smaller than than that of Shreveport, La." need a $12,900,000,000 bailout???
Mar 18, 2013 2:43PM
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By the way, Charley... I am totally tired with Ben Bernanke keeping the markets flush while We the People are flushed down the Urinal of Purpetual Obligation for his failure. How about a nice WANTED poster for Ben and a sizable reward for dragging his scholarly butt out into the daylight.
Mar 18, 2013 5:35PM
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Iceland was faced with a similar financial crisis in 2008-09 and after a few bad months the economy recovered, the government learned an important lesson and cut back on entitlements and profligate spending, and life went on.  The same will happen here with Cyprus. 

 

As Havasu46 says, "socialism is fun until you run out of other people's money."  What do you think about that, Barack Hussein???

Mar 18, 2013 10:44PM
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I doubt it, but maybe this will finally open the eyes of all the tax and spend, debt has no consequence morons running around in the United States voting for the Obama's, Reid's, Pelosi's and other disasters. Socialists will stop at nothing to support their lifestyles at the expense of others. Don't think that raiding bank accounts is off limits in the United States. There's already talk about the government eying your 401-K and IRA.
I bet the citizens of Cyprus are not armed. If so the government would probably not be so bold. Just remember that. The second amendment has nothing to do with hunting, sports, arming a militia 200 years ago, or other irrelevant things that Liberals would want people to believe. Its always been about we the people having the ability to overthrow the government when it gets too totalitarian, by force if necessary. And that DID get taught in school at one time in this country!
Why do you think the Liberals are always pushing for gun control? For YOUR well-being? I think not.   
Mar 18, 2013 4:29PM
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Here’s why this saga is like a Monty Python skit:

 

Russians, Europeans and others use Cyprus Banks to hide lots and lots of money from their countries tax system.

 

Some of these Cypriot deposits may be gains, -profit generated from legitimate investments made with EU debt instruments, which of course could involve loans made to Cyprus.

 

The old EU loans are close to default and the Cypriots need new loans to pay the old loans.

 

So the Cypriots seize all bank deposits which could include deposits from some people who may have had a part in Cypriots debt problem.

 

So in the end Cypriots can say good news, here is the money we owe you on our loans, and now for the bad news your bank accounts are empty……… and now we demand a shrubbery.

Mar 18, 2013 2:35PM
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It isn't Cypress itself that's causing concern and we are yet to get to the level of concern we need to, right now. Central Banks decided to extract saver-money to cover obligations. They didn't create new bonds. They didn't go after stock certificates. They didn't generate derivatives or new debt contracts. They attacked the one level of finance that is absolutely taboo... actual cash shelved away from the melee of corruption and supposedly sheltered in trustworthy ways. No longer. I have been saying the same thing for quite some time now--- Close the banks, end the Federal Reserve (Central Banks) and get RID of Wall Street. Each is toxic, corrupt and no longer viable to the needs of civilization. Think it through... better to wreck it and pull a new stable currency system (or a thousand) out of the carnage wreckage. Each of us was born the same way, why are we allowing 1% to live an entirely different way and conceding to it? Let's end the classes and have clashes if class fools don't immediately cooperate in a positive way? Sorry, but I don't fear artificial power. I also don't drink Kool Aid.
Mar 18, 2013 5:17PM
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Go ahead and try that here. I don't use a bank, so you'll get no moolah from me. I'm not here to loan money to people who don't know how to handle it, and I ain't talking about the poor people!
Mar 19, 2013 3:56AM
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We don't have to worry about it here because the "taxation" has already begun along with inflation. The 2% payroll tax is just the beginning with much more to come such as "Obamacare" tax penalties for non participation of this forced health care debacle.

 

The banks here have received $billions in taxpayer bailouts from reckless gambling in the credit swap default "crap table". Goldman Sucks being among the most offensive gambling against our own economy.

 

If in fact the Cyprus Syndrome does reach us,dipping cutting into our accounts. Hold on to yer cash cause nothing is guaranteed.

 

 

Mar 18, 2013 4:33PM
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"the Blammee"....Please read the Article before commenting....

 

This is NOT, repeat NOT a CNBC Website,Blog nor Article...

 

It comes from an author on MSN...Microsoft Money Source !!! 

Has NO connection to NBC, which used to be a General Electric Company,(maybe partially owned)?

Comcast recently purchased NBC, all or their part of GE's ownership..

Recently MSNBC, past several months, MS and NBC went their seperate ways also..

This SEGMENT has been called "Top Stocks" and look's as if it might change titles and become

"Investor Beat."

Are you related to Socialist 1 or living in the "same household" together ??

Mar 18, 2013 4:18PM
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Yup Socialist, You might want to comment on Cramer's  Article....

 

This is our reverred Charley's article and comment section...We try not to Dis him here...

We normally like what he has to say or point out, what we might have missed..??

 

Blaine usually points out facts and offers muted Commentary..Not "severe guidance" or pumping anything he doesn't think is worthy of giving a second glance..

As far as Cyprus...That's just a "Headline Grabber" today..

Do we have your un-divided attenion yet....??

 

Mar 18, 2013 4:44PM
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Cyprus....SCHYPMUS....The Mediterranean and the Middle East...Need to solve their own problems.

Looks like the Russians went all in...Got what they probably deserved, hiding money..?

Mar 18, 2013 7:54PM
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13 billion moving the world economy.............lmao

 

Mar 18, 2013 3:54PM
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Let' hope the Jew bankers in this country don't get an idea of bringing this here.  Although if they did, it would be a sure way for a run on all their banks.
Mar 19, 2013 9:54AM
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This is what America would have looked like if that piece of human garbage Romney got into office, only difference is he would not tax the top 1%, just the rest of us who can't afford to hide our money in off-shore accounts so that we don't have to pay our taxes.  The rich people in this country are the ones who ruined the whole world's economy, and for those of you who think that is "propaganda and lying" then I would advise that you shoot yourself in the head because you're too blinded by ignorance to understand.  Old, rich people are the ones who got us into this mess, and now everyone wants to blame Obama.  For you dumba$$es out there, lets not forget who had 8 years before him to really FUBAR our econmy.  So go run to your guns and bibles and when judgement day really comes, you'll find out that you are far, FAR from being righteous.
Mar 18, 2013 3:15PM
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The last time little, old ladies became so outraged was when Little Red Riding Hood questioned "Grannie's" identity.

 

Don't the facts tell us that the tax plan would mostly hit the Big, Bad Wolf: Russian crooks?

Mar 18, 2013 2:31PM
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WHO WOULD HAVE THOUGHT TINY CYPRESS WOULD CAUSE A GLOBAL PANIC?

ONLY YOU CRAMER

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