Cyprus Has Won the Battle but the War Is Still Undecided

It has taken the smallest nation in the Eurozone of the European Union to stand up to the bullying tactics of the large countries, led by Germany, who impose insupportable conditions on weak, small southern Eurozone states that have been unable to support the strict fiscal conditions required of them when they made the Euro their currency. The Cyprus parliament voted today to reject, by a vote of 36 nays with 19 abstentions and no yes votes, the €10 billion bailout offered by the European Union because it includes the highly controversial 6.75% to 9.9% bank deposit tax that one Cypriot legislator called "raw blackmail." The rejection leaves Cyprus's bailout in limbo. Without an external injection of funds, the country's banks face collapse, largely because of their over-exposure to troubled Greek banks, and the government could go bankrupt. Cyprus will now have to create an alternative plan to raise the money. The government could offer a compromise bill that would be more acceptable to lawmakers than the deposit tax, but the EU powers are not making it easy to find a solution by their insistence on an unchanged total amount of €5.8 billion, in whatever way Cyprus chooses to allocate it among depositors. And the Cypriot parliament has already rejected any attempt to levy the confiscatory tax on small deposits of less than €20,000. The Cyprus government faces rising fury at home and from Russians who make up an estimated third of the total amount deposited in Cypriot banks and would lose an estimated €31 billion if the tax were levied. EU proponents of the deposit tax argued it would have made foreigners who have taken advantage of Cyprus's low-tax regime share the cost of the bailout of the banks. Finance Minister Michalis Sarris flew to Moscow Tuesday afternoon to meet with his Russian counterpart, amid rumors that Cyprus may ask Russia to fund its banks so that the EU bailout can be avoided. Cyprus fears that wholesale exemption for those below €100,000 would mean a "disproportionate" burden on large savers, and a "very detrimental" knock-on effect on economic growth because it would destroy the ability of the country to attract foreign investment. President Nicos Anastasiades, who was elected less than a month ago, told German Chancellor Angela Merkel Monday night that "the possibility of reducing the requirements from self-raised funds is being explored," a Cypriot government spokesman said. Meanwhile, all over the EU, bankers and financial experts continue to condemn the EU action as the most negative choice they could have made, saying that the EU will regret it for years to come, even if the Cyprus crisis is resolved. Perhaps the deepest cut was the remark that they had behaved like politicians with no appreciation of the financial fallout of their decision. There is an old saying that fully applies : "Trust is like paper. Once it is crumpled, it can never be perfect again."