There is no alternative to the deposit tax to raise money for the bailout. The contingency plans focus on what to do after the bailout occurs. A large amount of account withdrawals is expected in the wake of this bailout, and Cyprus and the troika are considering steps to staunch the outflow of deposits.
Cyprus is likely to impose capital controls including limiting daily withdrawals and the amount of money that may be electronically transferred out of the country both physically and electronically.
Of note, Euro officials do not believe that a contagion will spread from Cyprus to the rest of the Eurozone banking sector. This may be the reason why Germany is playing hardball with the Cypriots.
The ECB is stalling to create extra time for Cyprus and the troika to work out a deal. Cyprus will extend its bank holiday until the end of the week. Couple with a national holiday on March 25, this action creates another five days for the troika and Cyprus to reach a deal.
In the meantime, since the banks are remaining shut, the ECB’s vote on continuing ELA is moot and won’t be held at its mid-month meeting. The ECB does not want to precipitate a collapse by voting to end Cyprus’ ELA and will wait until the troika makes a political decision before acting.
The Germans have blinked every time during the eurocrisis in order to maintain the stability of the eurozone. This time, they are given every indication that they will not allowing Cyprus to sink if it does not adopt an appropriate bailout plan.
German politicians have taken the position that a Cypriot default and exit will not precipitate a general euro crisis. Moreover, the MPs believe that they will not be able to justify a bailout of whom their constituents believe to be Russian organized crime.
I agree with the Germans in one sense. A Cypriot default will not create a Eurozone panic immediately; it will merely sow the seeds for the endgame. The next time a country comes under market pressure, investors will recall the treatment of Cyprus and attempt to get all of their money out before it is too late. Once the markets move, it is already too late. Invest wisely.
This article doesn’t answer the question posed by its headline. There are references to what will not happen, i.e. a broad deposit-based tax, but there is no alternative presented save for the usual hope of a white knight arriving to fix everything. The white knight in this case is Russia, so don’t expect much.
Europe made two mistakes here. First, the structure of the bailout will destroy Cyprus’ largest economic engine. Imagine if the U.S. bailed out Michigan, but as a consequence of the assistance the state could no longer manufacture cars. While it would be saved temporarily, over the long term it would have no way to pay back any loans without the contribution of its largest industry. That’s exactly what the troika has done by destroying Cyprus’ status as a banking have with a deposit confiscation and proposed capital controls.
Second, Europe has destroyed the concept of deposit insurance and resolution authority with this heavy-handed bailout. The fact that it is so cavalier about these facets of a proposed banking union shows that the rich countries will never become joint and severally liable with the poor countries for the entire Eurozone banking system.
Without a closer European Union of which a banking union is a mandatory component, the euro crisis will continue to fester until the eurozone disintegrates.