The Ripple Effects Of Cyprus' Financial Crisis

Cyprus lawmakers rejected a $13 billion bailout package that included controversial taxes on bank deposits. The proposed tax would have helped to pay for the bailout of crumbling banks. NPR's Marilyn Geewax explains how the events in Cyprus could affect the global economy and what may happen next.

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LYNN NEARY, HOST:

And now, we turn to Cyprus and how that island's bank bailout could affect the global economy. About an hour ago, lawmakers in Cyprus rejected a $13 billion bank bailout package that included a hefty tax on deposits on that country's banks. The money raised was - will help pay for the bailout of crumbling banks. What happens next is far from clear. Already the turmoil has triggered a run on cash machines in Cyprus. The very thought of savers pulling their deposits out of banks is making investors everywhere very nervous about the stability of financial systems. Joining us now in studio 3A to explain the crisis in Cyprus is Marilyn Geewax. She is senior business editor for NPR News. Marilyn, so good to have you with us.

MARILYN GEEWAX, BYLINE: Hi, Lynn.

NEARY: So tell us about what just happened now, in Cyprus. Explain what just happened now.

GEEWAX: Well, let's just say that if we had been talking about at this time of year, a couple of decades ago, we probably be focused on sun tan lotion because it was mostly known as a tourist center. It was a nice, warm place to go and relax. But over the years, it's become known as a financial center, kind of the way that Cayman Islands has become on in this hemisphere a place where people have fun and they invest. Well, in Cyprus, a lot of people were going there and putting their money into the banks. And what happened was there was a banking crisis that looks like the banks were crumbling. And because Cyprus, even though it's a tiny island nation, it's part of the European Union. So they to the European Union, to the Central Bankers there and said help bail us out. We need help.

There was a plan put together this weekend and the parliament in Cyprus needed to vote on it this afternoon. So what we saw this afternoon was that vote on do you like this bailout package or don't you like it, can you approve it? Well, the problem is the streets were full of people who were protesting. They were very angry about what was in this package. And the reason they were so angry was because part of the way that they were going to pay for this bailout of the Cyprus banks was by taking some money away from depositors. So imagine how you would feel if you put your money into your bank and you thought it was safe, you thought it was insured, and all of a sudden, you found out that you're going to lose, for people with bigger deposits, up to nearly 10 percent of their money which was going to go away to pay for a bailout. So people were pretty upset.

NEARY: And so the government turned down that...

GEEWAX: Yes.

NEARY: ...that idea. So they're not going to. No tax.

GEEWAX: It was so distressing to so many people. I mean, they had, I think if you look in the papers today, you'll see a lot of pictures where people painted the word no on their palms where their money should be. They were very distraught about it. And...

NEARY: Because people were, you know, some of the smaller - people with smaller amounts in the bank. You know, you're talking about people's retirement funds and just this year, college funds. Things like that were going to do.

GEEWAX: I think you'd see more than people just writing the word no on the palm of their hand. If you told Americans that all of a sudden, you know, a big chunky, you're savings was going to be used to directly bailout bankers who made terrible mistakes, if not, actually committed corrupt actions. So of course, the people were very distraught. And in the end, the parliament, as you said, they voted just a little while ago, and not one lawmaker voted in favor of taking away people's money. Now, in terms of what people think about that. I mean, how do investors around the world react to this? You know, a lot of people thought this was a crazy plan. They were very unhappy with the European Union officials for coming up with a plan that took away depositors money. And that's because ultimately - and here's the part where it affects us, this whole financial global system is based on simple trust.

We have to believe that if you put your money in the bank, I mean, it's - you have to believe that it's going to have some value and that when you come back, that money is still going to be there. If you start to erode that trust in the basic banking system, you're really undermining the whole global financial system. And that was the thing that had everybody saying, holy cow, what could they be thinking?

I mean, I've seen some economists and analysts who were really - reacted very strongly and said this was just crazy talk. They never should have done this, that you're taking away that fundamental trust in the system. And remember, we here in the United States, our banks are often very integrated in a lot of financial ways with Europe. I mean, I can't - you know, my mother has a credit card in her wallet that's an HSBC credit card. And that's a European bank, Barclays, UBS.

I mean, there are many banks here in the United States where there's not that much difference between our banking system and theirs in that all of this money flows around the world. So people watch this very carefully. We want to have a high level of trust in banking, and taking away deposits was not a great idea, maybe.

NEARY: Well, you've talked about the situation in Cyprus as being kind of like a game of dominoes where one domino falls. And one of the big pieces here was Russia, which was - I was fascinated when I started hearing how upset Vladimir Putin was about this situation.

(LAUGHTER)

GEEWAX: And, you know, he gets cranky.

NEARY: Yeah. Explain that to us.

GEEWAX: Well, now this is, again, part of this idea of why things are so connected. And here's why they did want to do this. All right. Cyprus is a center for banking, but it's one of those somewhat secretive centers for banking. And there were a lot of Russian billionaires, people who've made a great deal of money in energy, and they need a place to put their money. So they were putting it into these Cypriot banks. And when the banks started to crumble, a lot of people in Germany, a lot of Europeans said, you know, we're really kind of sick of all these bank bailouts that we get stuck with.

So for once, can we please put the hurt on somebody else? Let's take it out on the depositors. Well, if a lot of the people who deposited money in banks in Cyprus were Russians, you know, if you think about it - let's just say the Germans and the Russians, if you look back over the past century, haven't always had the warmest relations. There's a lot of residual suspicion and anger toward each other. So there were a lot of people in Germany who said, why do we always get tagged when it's Russian money actually going into these banks?

NEARY: Yeah.

GEEWAX: Make them pay up. And that's where this idea of cutting into the Russian depositors came from. And so on the positive side of this plan, you can see why people would say that. Why not make the Russians pay up a little bit?

NEARY: All right. So they're not going to do that now. But what are they going to do?

GEEWAX: So now the plot thickens.

NEARY: Do we have an idea?

(LAUGHTER)

GEEWAX: (Unintelligible) yes. So plan B. Well, here's an idea for plan B. Not only does Cyprus have nice sunshine and lots of fun things to do there, but they also have a lot of natural gas. And as we see in our own country, natural gas is really being developed now. There's a lot of demand for it. And it's possible, some of this, you know, we just don't know. Is it just crazy talk? Or could it really come together?

But they're trying to cook up an idea where maybe if you promise natural gas reserves to the Russians, to say to Putin and his compatriots to pony up some of this money, give us several billion dollars to help bail out these Cypriot banks, and in exchange for that bailout, you can, you know - of course Russia is very big in the energy business - you could come and use some of this natural gas and you'll get repaid that way.

So maybe there's some kind of a deal that could be put together that involves this natural resource and Russian energy expertise where they can find a way to bail themselves out with their own natural resources.

NEARY: Let's take a call now. We have Christopher calling from Sacramento, California. Hi, Christopher.

CHRISTOPHER: Hi there. How are you today?

NEARY: Good. Thanks. Go ahead.

CHRISTOPHER: Good. Yeah, I think it's interesting that a lot of people are commenting on the connection between the Cypriot banks and the Greek bank crisis. So many of the Cypriot banks had their money deposited in the Greek banks...

GEEWAX: That's right.

CHRISTOPHER: ...and then when the European Union forced creditors to take a 53 percent haircut, that devastated Cyprus. And so I think it's important to note that this is not necessarily a crisis of the Cypriots', you know, creation but it was something that was imposed on them three years ago. And the EU has only now decided, you know, to try to help them in this fashion. So I think, from the Cypriots' perspective, they find it rather unfair.

GEEWAX: Right. And let's...

NEARY: Well, let me have Marilyn explain that a little bit more. Thanks so much for bringing up that point, Christopher. It's a good one.

CHRISTOPHER: Yes, thank you.

GEEWAX: Well, that's true, that, you know, these banks, when money comes in, you drop off your deposit, and the bank has to do something with it. They don't just put it in a shoebox and bury it in the backyard. They have to invest it in something...

NEARY: Maybe they should.

(LAUGHTER)

GEEWAX: Increasingly, that shoebox seems like a great idea, doesn't it? But they had to do something with the money, and one of the things they did was because they're part of this European Union, they were investing in European bonds. And particularly, there are a lot of connections in business and - ethnically between the people of Cyprus and the people of Greece, so a lot of the investments went into these Greek bonds. Well, if you've been following the news at all over the last two years or so, Greek bonds have been in a lot of trouble.

They've had to have several buyouts, and they also had to have some write-downs where you didn't get back what you thought you were going to get. And that was a big source of the problem for the Cypriot banks. But allow me to say, you know, Cyprus isn't also just a completely innocent bystander here in that they expanded their banking system very dramatically, far beyond what you would think a small island, you know, this is a little island in the Mediterranean Sea.

And, you know, their bank assets were something like eight times their gross domestic product. So they really, really got into banking and maybe they should have focus a little bit more on the tourism because the banking has ended up being just too big. And that's why, you know, when the E.U. went to try to figure out how can we do this bailout, people who don't know about it's the Willie Sutton, you know, go where the money is.

And in Cyprus, where the money is, is in the banks. They had developed an economy all around having these huge deposits. So when the banks are in trouble and they have these big deposits, it sort of make sense from the perspective of the European officials to say, let's go where the money is and try to get some of those deposits to help pay for these bailouts.

NEARY: Oh, back to your domino's analogy. What does this mean for the U.S. and for the U.S. - the economic recover here in this country?

GEEWAX: It's such a connected world. You know, this is just such a fine example of how linked everything is. Think about this. The population of Cyprus is about the same size as Birmingham, Alabama. And Birmingham went bankrupt about a year and a half ago. But I can't imagine - it didn't seem like people in Europe were sitting around saying, oh my goodness, what's happening in Birmingham? And that's because Birmingham was part of a state, its part of a big country, it just sort of blended in, and United States has so far at least always managed to pay it bills and so people didn't have any systemic concerns particularly. But in Cyprus because there been one country after another with all these problems, people are really worried about chained reactions.

NEARY: All right. Well, thanks so much for being with us, Marilyn.

GEEWAX: Oh, you're welcome.

NEARY: Marilyn Geewax is a senior business editor for NPR News, and she joined us in Studio 3A. And you are listening to TALK OF THE NATION from NPR News.

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