Some thoughts inspired by the crisis in Cyprus.

European Financial Stabilization Mechanism, EFSM, has sent the first tranche of bailout to Cyprus in the amount of two billion Euros. The term for the financial assistance providing was the elimination of the second largest Bank of the country (Cyprus Popular Bank – Laiki) and the restructuring of the National Bank in order to Cyprus itself would save 13 billion Euros. Who has suffered from the scenario consummated?

Evidently, ordinary Cypriotes should be satisfied and happy. The financial collapse effected on the Cypriots rather weakly. All of their deposits were insured, or did not exceed 100 thousand Euros. Those who come within the anti-crisis program are investors from other countries (According to the Central Bank of Cyprus, foreigners form 70% of victims of the write-off of deposits). Most of them are Russians. It is Laiki Bank, where Russian client preferred to keep their money, that is explained by the fact that the contribution could be issued without even leaving the country. The economic reporter of Fox Business (www.foxbusiness.com) Matt Egan supposes that the initial propose of Cyprus to levy on all deposits, not just high-end ones, was an attempt to avoid punishing wealthy foreigners. Another opinion is that rather than offend the entire population of Cyprus, the government of Cyprus has offended the wealthy clients of the two banks. Most voters are not affected, the second term of office of the President of Cyprus is provided.

Actually, it is no longer important, where is chicken and where is egg. The government approved a bill on the taxes and fees increase. New documents provide further reduction of salaries of civil servants, and the taxation of real estate. The voters cannot be satisfied.

So, the country which deposits represent nearly 400% of GDP, was not afraid to offend their biggest investors. Actually afraid: the Parliament of Cyprus approved the decision on acceptance of the conditions of the European Union by a majority of just two votes (29 vs. 27). But it is not so easy for a small island state to “disobey” the European Union.

Why, in turn, the European Union has gone to such strict measures? (Matt Egan: “The decision to treat Cyprus as a special case marks an about-face from recent efforts to further integrate the euro zone banking system all under a single regulator”). Seems to it is like a sort of “metal fatigue” – the EU starts getting tired of the continuous infusions of money into its “periphery”, but nobody has suggested other way of salvation of crisis economies.

Within the EU framework Cyprus is not so large an offshore jurisdiction, there are larger ones; besides the majority of investors there are the Russians, though Russia is a member of WTO already, but not in the euro zone. “Quite frankly, the people who put their savings in high interest rate bank accounts should recognize that high interest represents higher risk. The regulators in Cyprus and Russia should have highlighted that to their own residents,” said Jan Randolph, director of sovereign risk at IHS Global Insight. Does this mean that investors in other offshore areas also should begin to be rather afraid of? In any case, the tendency to increase control over offshore zones continues to strengthen: how to make to pay taxes those who keep the money in the offshore zones – is the topic of meeting of the heads of the Tax Services of the Organisation for Economic Cooperation and Development, OECD, took place in Moscow on the 16-17th of May (http://www.oecd.org/newsroom/upcomingevents/#MAY). One of the proposals: full access to the databases of those who keep the money in a tax haven.

I do not presume to predict how the situation will develop further, but perhaps, the island will lose the status of a convenient jurisdiction with low taxes and comfortable storage terminal for capital. How the economy will get out of this situation is uncertain. GDP of the state is more than 80% provided by financial services. If this sector will be destroyed, what else Cyprus can figure on: tourism or the fields of the Cyprian shelf gas? Well, I do not know …

See:

Matt Egan. Cyprus Bailout Plan Breaks Cardinal Rule of Financial Crises. Http://www.foxbusiness.com/investing/2013/03/19/cyprus-bailout-would-break-cardinal-rule-banking-crises/#ixzz2Tahbjz5Q

Dmitriy Lozitskiy. Bankruptcy of Cyprus: what next? Http://finam.info/news/bankrotstvo-kipra-chto-dalshe/ (translation from russian)

Special report: Offshore finance. The Economist. 22.2.2007.

OESD. Countering Offshore Tax Evasion. Http://www.oecd.org/tax/exchange-of-tax-information/42469606.pdf

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