Cyprus Bailout And Bank Levy: It's About The Tax Haven Status

Includes: DRR, ERO, EU, EUO, FXE
by: Larry Trefz

It was announced over the weekend that eurozone finance ministers would force up to 10% of bank account holdings in Cyprus to go toward paying for the $13 billion bailout for the troubled peripheral euro member country.

The move was met with astonishment and rage by Cypriot citizens as cash machines were run dry over the weekend. Cyprus has declared Monday a bank holiday to prevent runs on the banks.

The bailout (or better termed "bail in") was arranged so as to offset the levy by compensating the account holders in shares of the banks as part of the deal.

Cyprus Finance Minister Michael Sarris on a CNBC Interview:

It's not a pleasant outcome, especially of course for the people involved. But we believe it is something that, compared with other possible outcomes, is the least onerous. And we also believe that the exchange of this levy with shares in the banking institutions affected gives an upside potential.

Due to the uproar from the citizens of Cyprus over the weekend, it was announced Sunday that officials in Cyprus would work to soften the levy on smaller account holders. European officials have also stated that the bank account levy in Cyprus would not set a precedent for dealing with other countries in the EU.

Given that Cyprus has been known as one of the primary tax havens on the European continent, it is very interesting that the EU would administer a bailout with these conditions.

It is also being reported that Cyprus is considering raising taxes and doing away with its tax haven image as a part of the EU bailout.

This leads one to speculate that perhaps the primary objective of the EU in this Cyprus bank account levy/bailout is to scare European depositors out of Cyprus who have been seeking to shelter their money from rising tax rates in many eurozone countries, such as France.

Viewed in this light, the bank account levy may not ignite a wider panic in the eurozone, as many are concerned with. Most other EU peripheral countries, such as Greece, have not had the reputation as a tax haven that Cyprus did.

EUR/USD fell below $1.29.00 Sunday night on the news. I would not expect a significant move further to the downside in the short-term, as markets will soon become aware that the Cyprus bank levy is indeed likely an isolated incident, meant for the purpose of shutting down the tax haven.

Chart forEUR/USD (EURUSD=X)ETFs that can be used to trade the Euro currency include: FXE, ERO, DRR, EUO.

Please note: Leveraged ETFs and ETNs are designed for short-term trading.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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