Expert: New aid package for Cyprus may lead to lack of confidence in all European markets

Business Materials 19 March 2013 17:54 (UTC +04:00)

Azerbaijan, Baku, March 19 / Trend A. Badalova /

The EU's decision to bring a package aid under the condition that deposits be taxed in Cyprus is very strange and dangerous, professor of economics at the Université Paris-Dauphine and Former President of the Mont Pelerin Society Pascal Salin believes.

He believes that in fact, the Cyprus problem - as well as the Greek one or other ones - is not a financial problem, but a problem of bad management of the public budget in Cyprus.

"And there is no reason to tax depositors, and, particularly foreign depositors, who are not responsible for the bad management of the Cyprus public budget," Salin wrote Trend via e-mail.

According to Salin, this decision will certainly create a loss of confidence in the financial market of Cyprus and induce outflows of capital from Cyprus to more stable countries, such as the UK, Switzerland or Singapore.

"But it also means that European public authorities are able to impose arbitrarily destructive taxes so that there could be a lack of confidence into all European markets," Salin said.

Cypriot authorities at a meeting of the Eurogroup in Brussels on Saturday morning agreed to the unprecedented conditions of the loan agreement designed to save Cyprus from default. Its main function is to force depositors to finance the anti-crisis program. The agreement provides for Cyprus to tax deposits above 100,000 euros at 9.9 per cent and those under 100,000 at 6.75 per cent.

The decision, announced on Saturday morning, stunned Cypriots and caused a run on cash points, most of which were depleted within hours.

Cypriot President Nicos Anastasiades now is looking to lighten the load on depositors holding less than 100,000 euros, to get the tax passed through the parliament so Cyprus can meet the requirements for its 10-billion-euro bailout.

On Monday eurozone finance ministers agreed that Cypriot President should be allowed to alter the tax agreed early Saturday in Brussels to protect small savers, as long as it still raised the agreed 5.8 billion euros, dpa reported.

"Unhappily, as for the case of Greece, European governments have decided that, whenever a government had difficulties in reimbursing its debt, it could get the support of other governments as far as it belongs to the eurozone," Salin said.

Thus, according to professor, the budget problem of a country becomes a euro problem.

"As far as the governments of the eurozone create arbitrarily this link between public budget problems and the euro, it is true that the Cyprus aid package can lead to another wave of the financial crisis in Europe, since it makes more obvious that there are such problems in several countries and the risk attached to Treasury bonds of Cyprus (or other countries) becomes a risk of all the financial system of the eurozone," Salin said.

"This may create instability in interest rates and, as financial markets are globalized, this instability may be transmitted to neighboring regions," Salin added.

Fredrik Erixon, Director of the European Centre for International Political Economy (ECIPE) also believes that there is now risk for contagion - that depositors in other crisis economies will take their money out of the national banks and put them elsewhere.

"We could again come back to the situation we had until half a year ago when money was flowing downhill from the crisis economies to the stable economies in the eurozone," Erixon wrote Trend via e-mail.

"Eurozone capital markets get fractured. And the more money that flows out of crisis economies, the bigger the problem for fragile banks," he said.