Can Cyprus Remain a Foreign Exchange Haven?

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Cyprus bankIn much the same way that profits earned abroad by American companies are not kept physically offshore, foreign exchange, brokers in Cyprus have been alerting clients that their accounts are not under threat from any confiscatory measures like the savings accounts for the citizens of the island nation.

Due to a favorable regulatory regime, Cyprus is one of the top five foreign exchange trading hubs for brokers.  While the gross domestic product of Cyprus is a small percentage of the total amount for the 17 nations of the Euro zone, it accounts for 18% of the $4 trillion in the daily trading of foreign currencies around the world.  That is up from 10% in 2010, according to Greenwich Associates.

But this massive presence in foreign exchange trading and its tax haven status has not protected Cyprus from the economic woes that have beset the other countries in the Euro zone. Cypriot banks invested heavily in Greece, and suffered tremendous losses when it defaulted two years ago. In order to remain a member and receive 4.2 billion Euros in aid, the Euro zone and the International Monetary Fund have mandated that Cyprus must now raise 5.8 billion Euros from its 1.1 million citizens.

Bowing to pressure from these international bodies, Center-right president Nicos Anastasiades proposed a tax on bank deposits.  For those with more than 100,000 Euros, there would be a 9.9 percent levy. Those on Cyprus with less than 10,000 Euros in savings would only have to pay 675 Euros.  Even with its version of a FDIC-style deposit insurance for those with under-six-figure savings, the citizens of Cyprus are still not protected from losses as a result of governmental fiat.

Due to its role as tax haven, the banking system of Cyprus is eight times larger than its domestic economy. If Cyprus had it own currency, it would simply inflate its way out of the crisis. Analysts project that there would be a 40% to 60% devaluation if Cyprus operated with its own currency. As it wants to remain a member and utilize the Euro as its medium of exchange, Cyprus is forced to bend to the will of the Euro zone.


Anna Timone (195 Posts)

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