March 28, 2024

Cyprus Gets First Tranche of Bailout Funds

PARIS — After striking an unprecedented deal in March to make many bank depositors help pay for an international bailout, Cyprus on Monday received €2 billion, the first installment of that money, aimed at buttressing the economy after the near-collapse of its banking sector.

European officials say the release of the funds, equivalent to $2.6 billion, was recently approved by a working group of the 17 euro zone finance ministers, who gathered Monday evening in Brussels for their regular monthly meeting. Cypriot efforts to stabilize the economy may be on the agenda. A second allocation of up to €1 billion will be transferred by June 30, officials said.

That session was a prelude to the planned meeting of all 27 European Union finance ministers in Brussels on Tuesday, where the focus is expected to be on proceeding with a European banking union that could stabilize the European financial system and avoid future debacles like Cyprus. Officials on Tuesday were to consider a single set of rules for dealing with failing banks throughout Europe, as well as discuss continuing efforts to curb tax havens.

The thorniest issue revolves around whether some depositors in any other European country should be made to suffer losses if their banks require an international rescue, as happened in Cyprus in an unprecedented and still controversial provision for a euro zone bailout.

In exchange for a €10 billion emergency aid package, Cyprus in March agreed to E.U. demands to effectively confiscate up to 60 percent of any depositor’s holdings above €100,000 held in two of the country’s largest banks, Bank of Cyprus and Laiki Bank. At the same time, Laiki Bank was forced to fold, merging into Bank of Cyprus.

On Tuesday in Brussels, part of the debate will involve where depositors should be placed in the hierarchy of creditors in the future rules on shutting down failing banks. The main focus is what to do with depositors holding more than €100,000. Some countries want all E.U. members to have the same rules, while others want the flexibility to decide where savers should be in the hierarchy.

The president of the European Central Bank, Mario Draghi, said at his recent monthly news conference that ordinary depositors be hit only after people who took risks by buying bonds in banks were forced to take losses. “If it can be avoided,” he said, “uninsured depositors should not be touched.”

In Cyprus, the issue came to a head after Germany and some other E.U. countries insisted on finding a new way to pay for a bailout of troubled Cypriot banks, which held large deposits from wealthy Russians. Some of the money was suspected of having questionable origins, meaning it would be hard for Berlin to justify using German taxpayer funds to clean up Cyprus’s mess. In the end, E.U. and Cypriot officials agreed that wealthy depositors would effectively have to help foot the cleanup bill.

The president of the Cypriot central bank, Panicos Demetriades, said last week that most of the depositors who lost money under the deposit-seizure system were foreigners. “Seventy percent of the value of the deposits concerned overseas residents, leaving Cypriot households and businesses unaffected to a greater extent than was possibly expected,” he said at a news conference.

Cypriot and Brussels officials had abandoned an earlier, even more controversial plan to skim a percentage of insured deposits — those under €100,000 in Cypriot banks. They pulled back that proposal after it set off tremors in global financial markets and raised the specter of a run on euro zone banks because of concerns that even insured deposits might not be safe.

It was still in an emergency atmosphere, though, that Cyprus imposed capital controls in March to prevent a flood of money from leaving banks operating there. Those restrictions have been eased gradually since then, but remain in place for all but a handful of foreign banks, despite initial promises by the government that the strictures might be quickly removed.

The entire episode has dealt a sharp blow to the Cypriot economy.

With restrictions on how much money individuals and businesses can withdraw or transfer from their Cypriot bank accounts, spending has been sharply curtailed. The economy, already in recession, is expected to contract at least 12.5 percent in the next two years. Unemployment, at 12 percent, is forecast to rise as the shrinking of the outsize banking system, demanded by Cyprus’s creditors, curtails lending and leads to job losses.

The bailout has also set off geopolitical tension over a trove of natural gas recently found in Cypriot waters, which Cyprus’s creditors hope could be tapped in the future to help pay off the country’s loans. Last week, the E.U. commissioner for economic and monetary affairs, Olli Rehn, pressed for the four-decade-old division of Cyprus into Greek and Turkish territories to be abolished, saying reunification would give Cyprus a “major boost to economic and social development.”

Such a move could also pave the way for faster exploration of extensive natural gas reserves off the coast of Cyprus, which Turkey, Russia and the European Union are all interested in pursuing.

Cyprus has been divided since 1974 after Turkey invaded the north. Turkish officials have warned the Cypriot government in recent months not to proceed with gas extraction unilaterally, or risk inflaming further political tension with Ankara.

James Kanter contributed reporting from Brussels.

Article source: http://www.nytimes.com/2013/05/14/business/global/Cyprus-Gets-First-Tranche-of-Bailout-Funds.html?partner=rss&emc=rss

Economix: Tax Havens and Treasure Hunts

Today's Economist

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

Our budget deficit would be smaller – and pressure to cut social programs lower – if corporate tax revenues had not declined over time relative to gross domestic product and relative to individual income tax revenues.

Center for Budget and Policy Priorities

Corporate America is a world leader in creative tax minimization. As David Kocieniewski reported in The New York Times, General Electric used some particularly innovative strategies to take advantage of overseas tax havens, including “offshore profit-shifting.”

The Boeing Corporation, a major federal contractor, has had a net rebate in federal taxes over the last three years, and a total tax rate of 4.5 percent over the last five years, though the company points to pension contributions and research credits that have reduced the bill.

In 2008, the Government Accountability Office reported that 83 of the 100 largest publicly traded corporations in the United States had subsidiaries in jurisdictions listed as tax havens; it cautiously emphasized that this did not prove that their decisions to locate there were motivated by tax minimization.

The British journalist Nicholas Shaxson takes a bolder and more aggressive swipe at the issue in a new book, “Treasure Islands,” arguing that the globalization of tax evasion is undermining fiscal and economic stability in developed and developing nations alike.

Mr. Shaxson provides a fascinating narrative that is both analytically compelling and rich in institutional detail. A section of the book’s Web site provides both a concise summary and a specific rebuttal of many assertions of offshoring cheerleaders.

While business destinations like Bermuda and the Jersey Islands play a colorful role in his story, Mr. Shaxson emphasizes the larger lack of transparency and accountability, characterizing both the United States and Britain as major tax havens.

He also outlines specific solutions, including international tax treaties. Some countries have adopted a poetically named General Anti-Avoidance Principle, which closes tax loopholes by stipulating that any act contrary to the spirit of the nation’s tax laws is illegal.

Here in the United States, the public interest group Citizens for Tax Justice proposes specific policy measures that could increase corporate tax revenue without encouraging corporations to shift profits or jobs abroad.

Publicity around these issues has generated a grassroots effort to publicly embarrass corporate tax avoiders. The organization UK Uncut mobilizes protesters by calling attention to cuts in public services that could easily be averted by improved corporate tax enforcement. Similar efforts are getting under way in the United States.

Some economists champion tax havens. In an article in the Journal of Economic Perspectives published last fall (also titled “Treasure Islands”), James R. Hines Jr. of the University of Michigan argued that they contribute to financial market competition, encourage investment in high-tax countries and promote economic growth.

Like many economists, Professor Hines expresses far more confidence in the market than in the state. He worries more about possible overtaxation than about undertaxation of corporate income. He does not engage with such concepts as “tax justice.”

The most vivid character in Robert Louis Stevenson’s beloved adventure story “Treasure Island” was the one-legged sailor Long John Silver. He never described himself and his colleagues as pirates. No, they were “gentlemen of fortune.”

Article source: http://feeds.nytimes.com/click.phdo?i=a53d6d6fab8b9f4777da3217289378c0