Cyprus Bank Levy: The Next Big Crisis in the Euro Zone?

The recent decision by the government of Cyprus to introduce a levy on Cypriot bank account savings has earned rightful derision from numerous sources. The decision, brought on by heavy pressure from the "Troika" (the IMF, the European Central Bank and the European Commission), was taken in order to qualify for euro zone bailout assistance. However, the implications of using this tactic to increase revenue may extend beyond the current crisis.

The levy, which will impose a 9.9% tax on those with savings over 100,000 euros and a 6.75% tax on savings below that number, is expected to raise close to 6 billion euros. It is a demand by the Troika, who consider it necessary before a $13 billion bailout can be handed to the cash-strapped island nation. President Nicos Anastasiades, Cyprus’ beleaguered leader, defended the move by suggesting that European Central Bank emergency funds would have been withdrawn, leading to dire consequences, potentially including bankruptcy and withdrawal from the euro. Anastasiades has offered shares in the banks, as well as government bonds, in exchange for the mandatory levy.

The failure of the Cypriot economy would not, in and of itself, inspire dread among pro-austerity governments in Europe. As the euro zone’s smallest economy, the failure of Cypriot banks would not have the effect of, say, a Spanish default. It is for this reason that excessive demands such as the bank levy could be made. In addition, the Troika were keen to avoid bailout money falling into the hands of money-launderers — Cypriot banks are suspected of harboring questionable Russian finances. These suspect accounts would also be affected by the levy, and the Troika will be hoping to capitalize on this outside money. 

Despite the relatively small direct financial implications that a Cypriot default would have on the euro zone, the effects of the bank levy on saver confidence across Europe could be telling. If this option is now on the table as a potential debt reduction strategy, citizens of single-currency nations could be persuaded that their money is no longer safe in banks, necessitating its transfer to what they perceive as safer options. 1.7 billion euros was withdrawn from Cypriot banks by foreign sources in January of this year simply through fear of a bank levy, so for this to happen on a wider scale would potentially be catastrophic. While European Commission officials have insisted that this is a one-off circumstance, this is unlikely to provide much solace to those who realise that a levy is now a potential option.

We have been told that the Cypriot case is "of an exceptional nature." The general public in nations across the euro zone will have to believe that this is true, if yet another crisis is to be avoided.