CHART OF THE DAY: The Gigantic Shadow Economy That's Making It So Hard To Bail Out Cyprus
The Cypriot banking system needs a bailout.
The EU, led by Germany, pushed heavily for the Cypriot banking system to contribute a substantial share of the bailout – 5.8 billion euros of the total 17 billion requested – by imposing a controversial "tax" on Cypriot savings accounts.
Market analyst Peter Tchir pointed out that, with relative ease, the U.S. passed a $60 billion rescue package for areas of the Northeast that were damaged by Hurricane Sandy, but the EU – Germany – isn't even willing to pony up a tenth of that amount to avoid all of the problems that have arisen as a result of the forced haircut to which Cypriot depositors are now being subjected.
The reason is pretty clear: Germany has a looming federal election in September, and it doesn't look good for them to support a bailout of a banking system with a reputation as an off-shore tax haven for moneyed Russian interests.
" We have argued many times before that the issue of wealth redistribution could become a source of friction within the monetary union," says NBF Financial Chief Economist and Strategist Stéfane Marion. "This is all the more true when it involves a member state with a large 'parallel' economy."
To put a number on it, Marion says that 26 percent of GDP in Cyprus is the result of " economic activities and the income derived thereof that circumvent or avoid government regulation or taxation."
That's quite a bit. Not only does it show why there's no political appetite for a bailout of Cypriot banks in Germany, but also how much Cyprus stands to lose if its status as a tax haven is jeopardized, which seems to be the direction this whole saga is headed.
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