1:06am

Mon March 18, 2013
Business

EU Bailout Tax Sparks Bank Run In Cyprus

Originally published on Tue March 19, 2013 7:08 am

Transcript

STEVE INSKEEP, HOST:

It's MORNING EDITION, from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE, HOST:

And I'm Renee Montagne. Stock prices are dropping around the world this morning, reacting to turmoil in the Mediterranean country of Cyprus. It's a domino effect that started on Saturday, when European officials approved a bailout of that country's biggest banks. The bailout requires customers to pay a tax on their deposits, and banks have already taken steps to freeze some of their customers' money. That proposal sent people rushing to their ATMs, to get their money out. And the uproar has reignited fears of a meltdown in the eurozone.

We're going to learn more about what all this means in today's "Business Bottom Line." Here to help us is NPR business correspondent Jim Zarroli. Good morning.

JIM ZARROLI, BYLINE: Good morning.

MONTAGNE: So to begin, the idea of levying a tax on bank savings sounds pretty extreme. I mean, no wonder it caused such panic. Where did the idea of doing this in Cyprus come from?

ZARROLI: The idea was actually hatched out in Brussels, in a meeting between leaders of Cyprus and the European Union. Cyprus's two biggest banks are about $17 billion in the hole together. So once again, you're seeing the EU coming in to organize a bailout. And in exchange, this time, they came up with this idea of levying this tax on bank deposits. And the tax, in some cases, is almost 10 percent. So you can imagine how unpopular that is. I mean, the idea that ordinary Cypriot people would have their money taken out of their accounts to help their bank because their bank got in trouble - it's not going over well.

MONTAGNE: Yeah. And where does the European Union get the authority to do such a thing - levy a tax on people's savings?

ZARROLI: Well, they don't really have the authority. I mean, this is something the Cypriot government has to agree to formally. The Parliament was supposed to vote on this plan on Sunday, but it's proven so unpopular. And it's not even clear now whether there's enough support in Parliament to pass it. I mean, you're already seeing a lot of politicians in the country kind of running for cover because it's been so controversial.

MONTAGNE: And during the euro crisis, has a bank tax like this been proposed before?

ZARROLI: Well, there have been some instances in the past where countries - like Italy - have levied taxes on bank accounts. But the tax was usually very small, in those cases. And of course, during the euro crisis, we've seen countries like Spain, like Ireland increase other kinds of taxes on residents. But we've never seen any country raise taxes this much on bank deposits.

And the problem is that, you know, unlike banks in a lot of other countries, Cyprus' banks don't get a lot of money from selling bonds. They mainly get it from taking deposits from their customers. So when they need to get money to pay back their bailout funds, their main source of money is taking it from customers because that's, basically, the only way they can raise it.

MONTAGNE: Cyprus, though - Jim - hasn't been a country that we've really been talking about a lot, in connection with the euro crisis. It seemed to come out of nowhere, for the most part. Can you tell us a little bit about how those problems developed so that it got to this state?

ZARROLI: Yeah. Cyprus is a really tiny country. It's an island in the Mediterranean. It's got about 800,000 people, and its economy is very small. But like other countries - like Ireland and Iceland - it sort of set out to become a financial center. You could get an account there very easily. It's very private; taxes were low. So a lot of foreigners brought their money into the country, especially Russians.

But just like a lot of other European countries, Cyprus has been hit by the recession. Its banks had a lot of money invested in Greece. Now, they're looking to be bailed out. And one of the problems is, these banks in Cyprus don't have a lot of bondholders. They get their money mainly from taking deposits. And when they need money, they have to go to their depositors. And that includes, you know, a lot of rich Russians right now. But it also includes a lot of far more ordinary Cypriot people, and they're going to be hurting.

MONTAGNE: Now, as you said, the Cypriot government needs to approve this new bank tax. Where does it go from here?

ZARROLI: Well, right now, the president of Cyprus is trying to - sort of adjust the plan, to make it more politically palatable. He's basically sticking with it. He says it's essential, to save the country from bankruptcy. If Cyprus can't save the plan, you're going to see a lot of concern rising up over the next few days about where Europe is headed. You're already seeing that, to some degree.

I mean, if the banks in Cyprus can't be saved, I mean, what does that say for the banks in Greece and Spain, and all of the other troubled countries? And we're already seeing that having an impact on the markets. I mean, the euro is down quite a bit. We've been here before. We've seen this before, and Europe's leaders have always managed to muddle through. So we'll have to see whether they can do that this time.

MONTAGNE: Jim, thanks very much.

ZARROLI: You're welcome.

MONTAGNE: NPR business correspondent Jim Zarroli. Transcript provided by NPR, Copyright NPR.

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