I recently caught up on my magazine reading for the first quarter of 2013. In doing so, I discovered a Businessweek article on a very distressing financial matter in Cyprus, one that we should all be concerned about (and particularly the savers among us). The Cyprus bailout is a good reminder for all of us to consider how our bank deposits are protected.
Terms of the Cyprus Bailout
Cyprus’ economy is in bad shape, leading Cyprus to be the fifth European nation to receive a bailout (the first four were Greece, Ireland, Portugal, and Spain). Last year, its economy shrunk by 2.4% and unemployment reached 12%. Two of its largest banks sustained heavy losses on Greek debt during the restructuring of Greece’s economy and have been surviving on emergency funds from the European Central Bank ever since. In an attempt to keep Cyprus in the eurozone, ECB had threatened to cut off funds propping up Cypriot banks unless agreements were reached. This is particularly not good for a country that has a large banking sector (based on deposits, Cyprus banks are an unsustainable four times the size of its economy).
The initial bailout was for a total of €17bn with €10bn coming from the eurozone and €7bn coming from Cyprus. Within a month of this agreement, after more economic analysis, the bailout package was increased to €23bn with the extra €6bn (a total of €13bn) coming from Cyprus itself.
So how did Cyprus plan to come up with their part of the bailout? Cyprus decided to use austerity measures as well as a very controversial saver’s tax to raise the necessary funds.
The Cyprus Saver’s Tax
Aside from austerity measures, selling €400m of gold reserves, and renegotiating the terms of a loan with Russia, the Cypriot government agreed that most of their part of the bailout would come from tapping the savings accounts in its two largest banks. It should be noted that this bailout deal, or the way the Cypriot government decided to come up with its portion, did not need approval from the Cypriot parliament. This is because it was achieved by restructuring the country’s two largest banks rather than levying a new tax on all of its citizens. You read that right; without the consent of its depositors, a new, substantial tax has been levied. Not only has this new tax been levied on a portion of Cyprus citizens, but it is estimated that nearly half of the €70bn worth of deposits in Cyprus’ banks is held by foreigners (the vast majority is believed to be from Russian officials and oligarchs looking for tax havens).
The levy was initially set at 6.75% on accounts under €100,000 and 9.9% on any deposit above that sum (with the option to alter this agreement to 3% on the smaller deposits and up to 15% on deposits above €500,000). In return, savers would be given shares in the banks and/or future profits from the country’s gas reserves. This initial agreement was thrown out.
An agreement was reached on March 25, 2013. In the end, those with deposits of less than €100,000 will not be taxed to help raise the money for this bailout. Here are some of the details:
- Laiki, or Cyprus Popular Bank, is to be closed. Its €4.2bn in deposits over €100,000 will be placed in a “bad bank”. Those with smaller deposits will see their accounts transferred to the Bank of Cyprus.
- The island’s largest bank, Bank of Cyprus, will be spared. However, a huge restructuring is taking place. It is thought depositors with more than €100,000 at the bank will also be involved in the recapitalization, and are expected to face losses of around 30%.
- Bank of Cyprus will inherit a €9bn debt Laiki had with the European Central Bank (ECB).
- Temporarily, a €100 limit was imposed on ATM withdrawals in Cyprus (in the month of April the limit was raised to €300).
- Cyprus must shrink its banking industry to the EU average size by 2018.
Eurozone’s Deposit Insurance
In these bailout talks one of the initial agreements was to tax 6.75% on accounts under €100,000. This was despite having a law in place that dictates all EU banks are required to insure deposits of €100,000 or less (agreed upon in the aftermath of the 2008 banking crisis). Thankfully, it did not happen. But this was mainly because the Cypriot parliament refused to skirt the law and tax deposits of less than €100,000.
Protecting Your Own Money
FDIC Insurance. After reading all of this, you might be wondering what insures deposits in the United States. The Federal Deposit Insurance Corporation (FDIC) was created by Franklin D. Roosevelt in 1933 to insure the deposits of customers. Since 1980, the FDIC insurance limits on insurable bank accounts were $100,000. But with 25+ banks becoming insolvent around the time of the stock market crash in the fall of 2008, fears among customers and small business owners started to rise. It turns out that these fears were rational, as only 63% of deposit accounts were protected with this $100,000 limit. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, allayed fears by making $250,000 FDIC coverage the new permanent limit.
FDIC Limits. How this limit works is per banking institution. So each of your accounts per banking institution is added up and counted towards this $250,000. You can open separate accounts at different banks to get more than $250,000 in FDIC insurance coverage. If you’re looking for a different bank to open an account to get additional FDIC insurance coverage, see our list of FDIC insured banks.
Does the Cyprus Tax Startle You?
As a diligent saver, all of this research and information has startled me. It’s not the fact that another European nation needed a bailout, nor the fact that a bank will be closing within the island of Cyprus that is shocking. What truly scares me was the levying of a tax without the consent of the Cyprus government/people (whether or not they would have reached a necessary consensus is a discussion beyond the scope of this article), as well as the ease with which there was an initial agreement to seize part of the assets of depositors with less than €100,000 despite a law being in place.
Let’s hope that we never have to deal with this in our lifetimes.
What are your thoughts?